Understanding Australian Taxes

2021 Tax Tips / By Tax Blogger / 25 minutes of reading

Understanding Australian Taxes

Are you a citizen of Australia or a permanent resident of the country? Do you run a company or otherwise bring in money from Australia? If this is the case, you are required to have knowledge of the Australian tax system.

This essay is going to give an overview of taxes in Australia and explain how they apply to individual taxpayers as well as corporations. In addition to that, we will go through some common tax deductions for Australians as well as some tax advice. Continue reading if you are interested in gaining more knowledge about the tax system in Australia.

In the realm of Australian taxes, unless you are a tax accountant, things can get quite complex pretty quickly. What exactly is the difference between the tax on income and the tax on capital gains, for instance? What are the costs associated with each option? And what kinds of deductions are available to you?

This blog post will assist address any and all queries you may have regarding the tax system in Australia. In this lesson, we will discuss some of the most frequent tax deductions that people file for, as well as the fundamentals of income tax, capital gains tax, and the GST. Continue reading if you are uncertain about your obligations when it comes to Tax Time or if you simply want to understand more about the way taxes are handled in Australia.

When it comes to matters of finance, Australia is something of a mystery. However, despite the fact that the system may appear complicated at first glance, once you have an understanding of its fundamentals, it is not that difficult to use.

In this post, we will discuss what you need to do in order to pay your taxes in Australia, as well as some of the most frequent tax deductions that are available to you. Read on for a comprehensive rundown of everything you need to know about Australia, whether you’ve just moved there or are just looking for a refresher course!

If you are a taxpayer in Australia, it is imperative that you have a solid understanding of the country’s tax system as well as the obligations that come with being a taxpayer. This article will provide an introduction to the most important taxes that are collected in Australia, such as the income tax, the goods and services tax (GST), and the capital gains tax (CGT). It will also explain how to fulfil your tax obligations, such as filing a return and paying payments, so that you don’t get in trouble with the government.

Did you realize that Australia has more than 2,000 different types of taxes? It should therefore come as no surprise that a large number of people experience feelings of anxiety when it is time to file their taxes. In this article, we will take a look at the functioning of some of the taxes that are most commonly used in Australia. In addition to that, we will offer some advice on how to get ready for tax season.

Are you taken aback by the amount of back taxes you owe? You’re not alone. Taxes in Australia can be difficult to understand, particularly for people coming from other countries.

This post on the blog will help clear things up by discussing the many kinds of taxes that are levied in Australia as well as how they are calculated. If you are aware of your tax responsibilities, you will be able to manage your finances better and keep more of the money you have worked so hard to achieve for yourself.

Tax time can be difficult to understand for Australians. Because there are a variety of tax rates and laws, and they appear to change annually, it can be difficult to keep track of what you owe in taxes and how you should go about paying them.

The purpose of this blog article is to assist make sense of Australian taxes, including what you are required to pay on an annual basis as well as deductions and allowances that you maybe could claim. In order for you to maintain the same standard of living while lowering your tax burden, we will discuss some strategies for lowering your taxable income.

Taxes are notorious for being difficult to grasp, particularly when attempting to comprehend how they are levied in a different nation.

This essay was written with the intention of assisting Australians living abroad in better comprehending the fundamentals of Australian taxation, such as what is required of you in order to file your taxes and the many sorts of tax exemptions that are available. Filing your taxes in Australia will be a breeze if you arm yourself with some basic information first.

So, let’s get started!

Progressive Tax System

Because of Australia’s progressive tax system, the amount of tax owed increases proportionally with an individual’s level of income. There are several different tax brackets, depending on whether you are a resident, a child, a tourist, or a foreign resident. In addition to this, after-tax payments to Medicare will be subject to an additional levy of 2%.

There is no avoiding it at this point. If you live in Australia and make money, the government there requires you to hand over some of that money to them in the form of income tax.

This includes money earned from wages and salary, as well as money earned from business earnings, bank interest, additional income streams, and returns on assets. The income tax is also applicable to assets, such as real estate and shares of a company.

What Is ‘taxable Income’?

Your taxable income is the amount of money that is left over after all of the costs associated with earning that income has been subtracted. You will be subject to taxation, and in order to determine how much tax to pay on your income, you will need first to add up all of the deductions and credits to which you are entitled and then deduct the total from your total income for the year.

The amount that is subject to taxation after this calculation is known as your taxable income. Taking advantage of every deduction for which you are qualified might cut the amount of income tax you owe.

How can I make my income tax payment?

If you work for an employer, then a portion of your wages or pay will be withheld on a regular basis to cover your income tax obligations. Your employer is obligated to make direct payments of your taxes to the Australian Taxation Office (ATO) using their accounting software at the beginning of each pay period.

If you receive money from sources other than your employers, such as bank interest, shares, or property, you are responsible for keeping your financial records and reporting that income.

You will be required to submit an income tax return on an annual basis. Your tax agent will be able to access your income as well as any taxes that have already been withheld from your paycheck by your employer; nevertheless, you will be responsible for disclosing any additional sources of income to your tax agent.

If your employer has paid a sufficient amount of tax on your behalf, you may be eligible to get a tax return after the necessary deductions have been made.

Who Is Required To lodge A Tax Return?

Even if their income is below the threshold, all taxpayers are still required to lodge a tax return. These are the following:

inhabitants of Australia whose annual income is higher than the tax-free threshold of $18,200 for the relevant financial year
Any resident taxpayer with an annual income of less than $18,200 who has had tax withheld for the current year through their place of employment is eligible for this credit.
Everyone who runs their own company or is otherwise self-employed, regardless of whether they make a profit or a loss.

When is the deadline for me to lodge my tax return?

You are required to lodge your tax return between July 1 and October 31 of each year (the last day for lodgement). However, if you employ a tax professional to file your return, you may be eligible for a deadline extension (up to 15 May). In the event that you need to submit an application for an extension, you should get in touch with the ITP Tax Accountant who is located closest to you.

It is not too late to file your taxes even if you missed the deadline, but you shouldn’t forget about it totally. When it comes to overdue tax returns, the ATO has severe fines and penalties. Working with a tax consultant can help you minimize the impact of these fines and find your way through the complexities of filing your taxes late.

How Can I Claim My Tax Deductions?

It is in your best interest to file for as many tax deductions as possible for the money you have spent on things related to your work, as doing so can significantly reduce the amount of income tax you owe. When people lodge their tax returns, this is one of the most common reasons why they get a tax refund.

Imagine that in order to obtain your wage, you have had to shell out money for things like buying and cleaning uniforms, paying for trips and meals, or continuing your education, among other things. If this is the case, then you might be able to deduct those expenses from your taxable income. But keep in mind that you can only deduct costs associated with your work. You are not allowed to deduct any of your personal costs from your taxable income.

Calculating And Paying Capital Gains Tax

A comprehension of capital gains and taxation

The difference between the amount you purchased for an asset and how much it ultimately sold can be considered a capital gain or loss. This takes into consideration any other expenditures that may have been incurred during the acquisition or selling of the item.

A capital gain is an increase in net worth that results when an asset is sold for more money than it was originally purchased for. A capital loss is what happens when you sell an asset for less than you paid for it.

Except for some exclusions, capital gains tax is imposed on gains realized when you sell an asset (the most common exemption is the family home).

When it comes to quickly calculate and paying the capital gains tax, being organized is essential. And if you want to be organized, one of the best things you can do is keep records that are up to date by keeping items like:

original purchase agreements and invoices for any goods and services purchased
interest accrued on borrowings connected to this transaction
revenues for ongoing costs of the business
expense records
valuations.

2. Choosing an appropriate method for calculating the tax on capital gains

There are a few distinct approaches to determining how much tax you owe on your capital gains.

Capital gains tax discount

If you sell or otherwise dispose of assets subject to capital gains tax in a period of fewer than 12 months, you will be responsible for paying the full amount of the gain. However, if you (as an individual) hold any capital gains tax asset for more than a year before selling it, you may be eligible to receive a discount of up to fifty percent of your gain (after subtracting your capital losses from your gain).

Indexation

If you purchased your assets before 21 September 1999 and have kept them for at least a year, then you have the option of indexing them. This is a different approach to consider besides the discount strategy. The indexation approach adjusts the cost base of your asset by a multiplier in order to take into account the effects of inflation (up to September 1999).

In the event that you have carried forward any capital losses from assets owned prior to 1999, you have the option of selecting the indexation technique.

Capital loss

If you have incurred a loss on an investment, you may lower the amount of tax you owe by subtracting that loss from any gains on investments you have made through other activities. You are allowed to roll over any capital losses to other income years, which is something that could come in handy at a later point in time, provided that you do not have any other capital gains during that income year.

3. Paying capital gains tax

When payment is due

Although it may seem that way at first, the tax on capital gains is not a separate entity. Your total assessable income will include a portion of your net capital gains, regardless of the year in which you paid capital gains tax.

You are required to pay tax on your capital gains as part of your overall income tax assessment for the applicable income year.

When not to make a payment

If you have a capital loss of any kind at the end of a given tax year, you should not have to pay any capital gains tax. However, the net capital loss can only be “carried forward” to offset capital gains in future income years and cannot be used to reduce the tax liability on any other type of income.

It is important to take note that the tax on capital gains does not apply to all events and assets. These include the sale of your primary residence or a personal automobile, as well as the sale of an asset bought before the introduction of the capital gains tax on September 20, 1985.

Have a complete understanding of the exemptions from capital gains tax provided by the ATO.

Working out your capital gain (or loss)

To rapidly calculate how much capital gains tax you’ll owe, take the selling price and remove the asset’s initial cost and associated expenditures (like legal fees, stamp duty, etc.). Your profit on investment is the amount that is left over (or loss).

If you have made a capital gain and you’ve held an asset for more than a year, you can deduct fifty percent of that gain from your taxable income if you don’t also have any other capital losses. This is assuming that you don’t have any other capital losses (unless the indexation method applies).

Different tax brackets apply to individuals and businesses when it comes to capital gains. If you run a business, for instance, you won’t be eligible for any tax breaks related to capital gains, and you’ll have to pay a tax rate of 30 percent on any net capital gains you make.

If you file as an individual, the rate you pay corresponds to the rate that applies to your income tax for the given year. The tax rate for SMSF is fifteen percent, and the discount is thirty-three and a third percent (rather than 50 percent for individuals).

What Is The Tax-Free Threshold In Australia?

The amount of money that you can earn in a given fiscal year before being subject to income tax is referred to as the tax-free threshold. The Australian Taxation Office (ATO) has said that the threshold at which one is no longer subject to tax is $18,200.

If you are an Australian resident for tax purposes, this indicates that the first $18,200 of your income each financial year is exempt from taxation; the point at which you begin to pay tax on your income is when it exceeds this threshold.

If you are a resident of Australia and have a tax file number, the tax-free threshold may allow you to minimize the amount of income tax that you are responsible for paying.

1. What documentation is required to claim the tax-free threshold?

According to the explanations provided by the Australian Taxation Office (ATO), making a claim for the tax-free level is often not too difficult. This is the good news.

You will be issued a “tax file number declaration” form to fill out if you start new employment or ask for a new Centrelink payment. All you need to do is respond “Yes” to the question “Do you want to claim the tax-free threshold from this payer?” on the form.

2. Who is eligible to claim the threshold?

When it comes to taxes, only people who live in Australia can take advantage of the tax-free threshold. If you are not a resident of Australia, you will be forced to pay tax on each and every dollar that you make as a result of your employment in that country.

It’s possible for a lot of individuals to move to Australia for tax purposes in the middle of the year, or they can depart in the middle of the year to stay outside of Australia.

In these particular circumstances, the minimum requirement would be $13,464. After then, the remaining portion of the standard criterion is reduced by a factor that is proportional to the number of months worked in Australia.

The following equation can be used to arrive at this conclusion:

$13,464 + $4,736 (the remainder of the standard tax-free threshold) x (the number of months worked in Australia as a resident ÷ 12).

3. If I have more than one employment, am I allowed to claim the tax-free level for each job?

In most scenarios, this is not the case because the accepted norm is to claim the tax-free level on only one job at a time. The Australian Taxation Office (ATO) states that if a person has two or more sources of income in the same financial year, “we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage.” In other words, if a person has two or more sources of income in the same financial year, they can only claim the tax-free threshold from the

If you want to claim the tax-free threshold from each payer, you can do so only if you are absolutely convinced that the sum of your yearly income from all payers will be less than $18,200.

If, on the other hand, your income for the year comes to be greater than $18,200, you will need to fill out a withholding declaration form and give it to one of your employers to let them know that you will no longer be claiming the tax-free threshold from it. This will allow you to avoid paying taxes on the excess amount of income.

If you fail to do this, you run the risk of being undertaxed, which would require you to make up the difference at the end of the fiscal year by paying more tax.

If, on the other hand, you receive the tax-free threshold from only one employer, your second income stream, as well as any additional sources of income above and beyond that, will be taxed at the higher rate applicable to those who do not receive the tax-free threshold.

The ATO warns that this may result in you being overtaxed during the year; however, any funds that were withheld in excess of what was required will be refunded to you at the end of the financial year in the form of a tax refund once you have completed and submitted your tax return.

4. What happens if I don’t claim the tax-free threshold?

If you do not make any claims against the tax-free threshold for a given fiscal year, you run the risk of being required to pay income tax on all of the money that you earn.

Since Australia’s income tax brackets and rates are based on the assumption that you claim the tax-free threshold to avoid paying tax on the first $18,200 of your earned income, this would almost certainly result in you paying more tax than you need to during the year.

Even though the ATO will most likely issue you a refund for the amount of tax that you have overpaid once you have completed and submitted your tax return, you will still be required to make additional payments of tax during the year.

According to the Australian Taxation Office (ATO), if you want to reduce the amount of tax that is deducted from your pay packet going the future, you can submit a PAYG withholding variation application form.

5. How does the tax-free threshold apply to PAYG tax?

When preparing your annual tax return, it is helpful to be aware of the yearly tax-free threshold figure, which is currently set at $18,200. Nevertheless, it is possible that it will not be of much use to you if you are trying to determine whether or not you are required to make pay-as-you-go (PAYG) tax instalment payments based on your regular income.

Instead, it would be beneficial to have knowledge about the corresponding tax-free thresholds that apply to ordinary earnings. The following, according to numbers provided by the ATO:

If you’re paid weekly, you’ll pay tax on any earnings above $350.
If you’re paid fortnightly, you’ll pay tax on any earnings above $700.
If you’re paid monthly, you’ll pay tax on any earnings above $1,517.

Use the income tax calculator on our website to get an estimate of the amount of tax that will be withheld from your yearly salary.

However, it is essential to keep in mind that in most cases, the tax-free threshold will not be applied immediately to the earnings you receive from your employer. Instead, the ATO advises that in order to receive the credit, you must make a formal claim for it if you begin a new job or submit an application for Centrelink payment.

In the event that this is not the case, your PAYG tax will begin to be computed from the very first dollar you earn, regardless of how much money you make.

Superannuation

1. Increasing your savings within the superannuation system

Recently, a friend of mine shared with me that she did not plan on contributing any further money to her retirement fund because she felt that it was too dangerous. There is a widespread misunderstanding that super is its asset class or investment category that can fluctuate in a manner that is independent of other asset classes. It is not that.

The easiest way to conceptualize a super fund is as a building that stores your assets in a variety of investments up to the time when you retire. For instance, you might hold the same portfolio of shares, property, bonds, cash, and other investments either inside or outside of a super fund in your name or some other structure, such as a family trust. You could even hold the portfolio outside of super.

Regardless of the arrangement of ownership, these investments generate income in the form of dividends, rent, or interest. When they are sold, they either produce capital gains or capital losses.

The way in which superannuation is taxed is a key differentiator; despite the fact that the government is always making changes, it is still the most tax-efficient place to store money for retirement.

Because of this and the length of time, your assets are permitted to grow in superannuation, you will normally get a superior return on your money in the long run if it is placed in superannuation as opposed to comparable investments made outside of superannuation.

2. When will I have access to my super?

In most cases, you won’t be able to start until you’re retired. On the other hand, if you “preserve” your nest egg in a superannuation account until you reach the legal retirement age, you can take advantage of a number of attractive tax concessions. The only circumstances that warrant making an exception to this rule are those involving extreme financial hardship, a disability, a terminal disease, or death.

People who had money in their superannuation accounts before 1999 may also be eligible for certain ‘unrestricted non-preserved benefits,’ which allow them to access their money at any time without penalty.

If this is not the case, your preservation age will be determined by the year in which you were born. For instance, the preservation age in Australia was 55 for people who were born before the first of July in 1960; however, this was subsequently raised to 60 for younger age groups.

Keep in mind that you must be at least 60 years old for your retirement income to be exempt from taxation.

3. Withdrawing funds from a super

You have the option to take your retirement savings and accrued earnings in the form of a lump sum, an income stream from a super pension, or a combination of the two when you reach your preservation age and retire. Withdrawals are often exempt from taxation, but if you are younger than 60 years old, there is a possibility that you will be required to pay tax on them.

Imagine that you are younger than your preservation age when you decide to take a lump-sum withdrawal in accordance with the restricted release restrictions outlined above. If this is the case, the tax rate that applies to you will be either 22% (including the Medicare levy) or your marginal rate, whichever is lower.

Before you may begin withdrawing money from your superannuation account, you are required to transfer up to a maximum of $1.7 million into a pension account. This limit is referred to as the transfer balance ceiling.

After that, you are required to take out a certain minimum amount each year, which is determined by your age and the current balance in your account. There is no upper limit on how much money retirees can take out of their accounts, but most of them err on the side of caution out of worry that they won’t have enough.

An account-based pension in the form of super pension that is most frequently seen. On the other hand, if you have reached your preservation age but are still under the age of 65 and actively employed, you may be eligible to receive a transition to retirement (TTR) annuity from your superannuation fund.

If you are over the age of 60 and get a TTR pension, the income you receive is tax-free. If you are younger than 60 years old, your taxable income will be subject to taxation at the marginal rate that applies to your age bracket, reduced by 15%.

If you have a sum in your super fund that is greater than $1.7 million, you have the option of keeping it in your accumulation account or taking it completely out of super. Even after you’ve reached retirement age, you can continue to keep an accumulation account active for as long as you see fit.

After beginning a super pension, you will not be able to make additional contributions until you stop the pension, which is known as a commutation, and begin it again with additional savings up to a maximum of $1.7 million in the pension account balance.

If you reach the preservation age, retire, and withdraw your retirement benefits as a lump amount before you turn 60, you may be subject to additional taxes. To reiterate, the rules are convoluted, and as a result, anyone who is considering retiring earlier than normal should seek the objective financial guidance of an expert in the field of retirement.

4. What happens when you die?

Your dependents, any other beneficiaries you have designated, or your estate are eligible to receive a death benefit from your super fund if you pass away before you have withdrawn all of your super.

If you have been paying life insurance premiums from inside your fund, you may be eligible for an insurance benefit in addition to the balance of your super account when it comes to death benefits.

You have to name the person or people who you want to get your death benefits once you pass away. There are two distinct categories for nominations:

A non-binding nomination acts as a guide to your fund’s trustees, but it can be overturned in some circumstances.
A binding nomination allows you to name your dependent or legal representative, usually the executor of your will, and stipulate that they receive your death benefits. Your legal representative then distributes the money according to your will. You generally need to renew a binding nomination every three years to remain valid, and most funds charge a small fee.

After your passing, your superannuation fund may, at its discretion, permit your spouse or other qualifying beneficiaries to continue receiving the pension they were getting from you. This type of pension is known as a reversionary pension because it “reverts” to the beneficiary of your choosing.

The taxable and tax-paid components of super death payments are both paid out to the beneficiary. The amount of tax that a recipient is required to pay is determined by the component, whether or not they are considered a dependent for tax purposes, and whether or not the superannuation benefit is received in a lump sum or as an income stream.

FAQs

1. Am I entitled to claim $300 for work-related expenses, as this does not have to be substantiated?

You cannot just claim $300. Before you can claim any expense, you must first actually bear it. Even if you may not be required to provide receipts for purchases up to $300, you are still required to demonstrate that you spent the money on something that is related to your job.

2. I have incurred travel expenses this year. What can I claim on my tax?

In order to be able to claim a deduction for the costs associated with your trip, that travel must be directly related to the performance of your job duties.

If this is the case and you have the appropriate documentation, you are eligible to make a claim for the cost of transportation as well as any incidental expenses incurred. For instance, if your travel required you to stay somewhere for the night, you would be eligible to make a claim for meals. When you travel internationally, you are required to keep a trip journal.

3. I am paid an allowance for travel. Can I claim a deduction for that on my tax return?

You will only be eligible for a deduction if you demonstrate that you have paid for a work-related expense and can provide the supporting documents. In most cases, you cannot claim the money you spend getting to and from your place of employment unless you are, for instance, transporting heavy equipment.

There are some awards that provide the payment of an allowance to the employee, notwithstanding the fact that the employee may not necessarily have incurred any expenses. Even if the allowance you have been given is larger than the expense you have incurred, you are not allowed to claim a deduction for an amount that is greater than the expense itself.

4. I had an overseas holiday during the year and, while I was away, attended a seminar that was relevant to my job. Can I claim the cost of the trip?

Because the primary goal of the trip was to take a vacation, and attendance at the conference was only incidental to this, you are unable to deduct the expense of the trip from your taxes. As a result, the only expenses you’ll be entitled to claim as a result of attending the seminar are the ones that are considered to be supplementary. These can include the cost of registering for the seminar, getting there via taxi, or other incidentals.

5. I keep a room aside for a home office and would like to claim some expenses.

If a taxpayer conducts all or part of their employment operations from home and has a room designated specifically for doing the work, then a portion of the taxpayer’s operating expenditures may be deducted. A log detailing the number of hours spent in the office performing work-related activities ought to be maintained for a period of at least one month in a journal.

After that, the rate of 52 cents per hour that the Commissioner offers can be claimed for hours worked at the home office. Unless the home is being utilized as a place of business, the only expenses that can be claimed for a home office are operating costs. These costs include energy, heating, and the depreciation of office equipment.

Deductions can be claimed on occupancy and running expenses in the event that a home is used as a place of business (and can be readily recognized as such, such as by having a separate entrance, signage, or clients or customers coming to a specific area of your home), and these expenses include the following: