In 2021 Tax Tips

Understanding The Australian Income Tax System

Did you know that the Australian income tax system is one of the most complex globally? If you’re not familiar with it or need a refresher, then this post is for you. 

We’ll go over the basics of how it works and outline some key changes that were made in last year’s budget. So whether you’re an expat considering moving to Australia or just curious about our tax system, read on!

A lot of people are confused about the Australian income tax system. And, understandably so – it’s pretty complex! So, in this post, we’re going to break down the basics so that you have a better understanding of how it all works. 

Don’t worry – we won’t be getting into too much detail! Instead, we want to give you a general overview of the system and some tips on making sure you’re paying the right amount of tax.

You need to understand a few things about the Australian income tax system if you are a foreigner working or living in Australia. Firstly, your taxable income will depend on your residency status and visa type. 

Secondly, there are several deductions and exemptions you may be able to claim on your tax return. And finally, the tax rates vary depending on your annual income level. 

So whether you’re a temporary visitor or thinking of making Australia home, it’s important to familiarise yourself with the basics of the Australian income tax system.

When you move to a new country, there are always many things that you need to learn about the new place to feel comfortable and get started with life. 

The same is true when it comes to understanding the Australian income tax system – there are some key concepts that you need to be aware of before filing your taxes. In this blog post, we’ll take a look at some of the most important aspects of Australia’s income tax system so that you can feel confident in preparing your return.

For people who are new to Australia or for those who are just looking to brush up on their knowledge of the Australian income tax system, this blog post is for you. 

We will outline the basics of how the system works and key things that you need to know to file your taxes correctly. So whether you’re a recent arrival in Australia or you’ve been living here for years, read on for a crash course in Aussie tax!

Are you an Australian citizen or resident? Do you earn income in Australia? If so, it’s important to understand the Australian income tax system. This system is complex, and several factors can affect how much tax you have to pay. 

This blog post will provide an overview of the Australian tax system and explain how you can calculate your taxable income. We’ll also discuss some common deductions and exemptions that may reduce your tax bill.

If you’re an Australian taxpayer, it’s important to understand the basics of the Australian income tax system. This article will give you a brief overview of how the system works and highlight some of the main changes introduced in last year’s federal budget. 

So whether you’re just starting in your career or you’re approaching retirement, make sure you read on to find out more!

Let’s get started!

Why We Pay Tax

As Australians, we enjoy access to a good health system, quality education, and various community facilities (for example, parks and playgrounds) supported through tax collections.

The Australian Taxation Office (ATO) collects these taxes for the Australian Government to provide services, including:

  • healthcare
  • education
  • defence
  • roads and railways
  • payments for welfare, disaster relief and pensions.

Tax (Financial) Advice Services

A tax (financial) advice service consists of five key elements:

  • a tax agent service (excluding representations to the Commissioner of Taxation)
  • provided by an Australian financial services (AFS) licensee or representative of an AFS licensee
  • provided in the course of advice usually given by an AFS licensee or representative
  • relates to ascertaining or advising about liabilities, obligations or entitlements that arise, or could arise, under a taxation law
  • reasonably expected to be relied upon by the client for tax purposes.

Tax Agent Services

Tax agent services are services relating to:

  • ascertaining (that is, working out) or advising about liabilities, obligations or entitlements of entities (that is, your clients) under a taxation law
  • representing entities in their dealings with the Commissioner of Taxation (Commissioner) concerning a taxation law
  • It is reasonable to expect the entity to rely on the service to satisfy liabilities or obligations or to claim entitlements under a taxation law.

There is a legal requirement that you must not charge or receive a fee or other reward if you provide a service that you know or should reasonably know is a tax agent service, and you are not a registered tax agent. 

A similar requirement applies to lawyers preparing or lodging tax returns; they too must register. These registration requirements are not part of the definition of tax agent services but are set out in section 50-5 of the Tax Agent Services Act 2009 (TASA).

Examples Of Tax Agent Services

  • Preparing returns, notices, statements, applications or other documents about your client’s liabilities, obligations or entitlements under a taxation law.
  • Lodging returns, notices, statements, applications or other documents about your client’s liabilities, obligations or entitlements under a taxation law.
  • Assisting clients with tax concessions for expenditure incurred on research and development activities where the service involves the application of taxation laws.
  • Preparing depreciation schedules on the deductibility of capital expenditure.
  • Preparing or lodging objections on behalf of a taxpayer under Part IVC of the Taxation Administration Act 1953 (TAA) against an assessment, determination, notice or decision under a taxation law.
  • They give clients advice about a taxation law that they can reasonably rely on to satisfy their taxation obligations.
  • Dealing with the Commissioner on behalf of clients.
  • Applying to the Commissioner or the Administrative Appeals Tribunal (AAT) for a review of, or instituting an appeal against, a decision on an objection under Part IVC of the TAA. 
  • Reconciling BAS provision data entry to ascertain the figures included on a client’s activity statement.
  • Filling in an activity statement on behalf of a client or instructing them which figures to include.
  • Ascertaining the withholding obligations for your client’s employees, including preparing income statements.
  • Installing computer accounting software and determining default goods and services tax (GST) and other codes tailored to clients.
  • Coding transactions, particularly in the circumstances requiring the interpretation or application of taxation law.
  • Providing a payroll service that involves interpreting and applying a taxation law, including reporting employee payroll information through single touch payroll (STP) enabled software.
  • Undertaking a payroll compliance review, providing an assessment and opinion on whether the client is compliant with their taxation obligations under one or more taxation laws.
  • Providing tax-related advice specific to client’s circumstances regarding PAYG withholding liability, Superannuation Guarantee obligations, fringe benefits tax laws, and termination and redundancy payments.

Not Tax Agent Services

  • Installing computer accounting software without determining default GST and other codes tailored to clients.
  • Coding tax invoices and transferring data onto a computer program for clients under the instruction and supervision of a registered tax or BAS agent.
  • Contracting the services of a specialist to provide advice about an area of taxation law that you have no expertise and cannot review for accuracy.
  • Services provided by an auditor of a self-managed superannuation fund under the Superannuation Industry (Supervision) Act 1993.
  • Providing general taxation advice to clients that do not involve applying or interpreting a taxation law to the client’s personal circumstances.
  • General training (such as a classroom) concerning computerised accounting software not related to particular fact situations.
  • Preparing bank reconciliations.
  • Entering data.
  • Transmission of data to the Commissioner through single touch payroll (STP) enabled software, where the data transmission does not require the interpretation or application of taxation law.

Partnerships and companies must have sufficient registered individual tax agents to provide tax agent services to a competent standard and carry out supervisory arrangements. 

This means that if you register as a partnership or company tax agent, you may also need to register separately as an individual tax agent.

Conveyancers

Conveyancers may need to register with the TPB to assist their clients with:

  • foreign resident capital gains withholding on certain taxable Australian property under contracts
  • GST on certain property transactions
  • annual vacancy fee compliance obligations for foreign owners of Australian residential property.

Labour Hire Firms And Service Trusts

Where a service trust or labour-hire entity provides services to a client and the client can reasonably be expected to rely upon the service to satisfy their liabilities or obligations or claim entitlements under a taxation law, the service trust or labour-hire entity may be providing a tax agent service and be required to register as a tax agent.

Generally, a service trust or labour-hire entity is unlikely to be required to register where there is another registered entity (including a registered individual) that is providing the tax agent service, and it is that entity that is directing the services being performed by the personnel provided by the service trust or labour-hire entity.

Types of Registration

finance and accounting concept. business woman working on desk

finance and accounting concept. business woman working on desk

You can apply for tax agent registration as:

  • an individual
  • a partnership or a company.

Before You Start Working

1. Permission to work in Australia

Before you start working in Australia, you must get permission from the Department of Home Affairs if you are a foreign resident. Home Affairs can provide you with useful information, including which visas allow you to work in Australia.

2. Get a tax file number

Your tax file number (TFN) is your reference number. It is free to get a TFN.

It would be best to get a TFN before starting work or soon after starting work. Otherwise, you’ll pay more tax. We issue TFNs to individuals, businesses and other organisations for identification and record-keeping purposes.

How you apply for your TFN will depend on your circumstances.

When completing your application, you will need documents that prove your identity.

It can take up to 28 days to process your TFN application and send your TFN to your address.

When you receive your TFN, it is important to keep this safe and not let anyone else use it.

3. Australian business numbers (ABN) are for business

Not everyone is entitled to or needs an Australian business number (ABN) to work in Australia. Having an ABN means you:

  • are running your own business
  • have to pay your tax to us
  • may need to pay for your own super
  • may not be insured if you’re injured.

When You Start Working

1. Complete a tax file number declaration

When you start working, your employer will ask you to fill out a Tax file number declaration to tell them your TFN and personal information.

They use this declaration to determine how much tax you need to pay. You have 28 days to complete the declaration and give it to your employer. After that, they must take tax from your pay at the highest rate if you don’t.

If you’re an Australian resident for tax purposes, you can claim the tax-free threshold when you complete your declaration. This means the first $18,200 of your yearly income isn’t taxed.

You can generally only claim the tax-free threshold from one employer. However, if you have more than one employer, you should claim the tax-free threshold from the employer that pays the highest salary or wage.

2. Paying tax

When your employer pays your salary or wage, they take out tax and send it to us. Your payslip will show how much tax you have paid. 

At the end of the financial year, your income statement or payment summary will show your total income from your employer and how much tax they have taken. Your income statement is available in ATO online services via myGov.

The amount of tax you pay depends on:

  • your tax residency
  • how much income do you earn
  • whether you have more than one job
  • whether you have a tax file number (TFN) – this is a personal reference number, which you should tell your employer after you start working for them.

Some employers prefer to pay in cash instead of to a bank account. This is okay, provided they still:

  • deduct tax from the money they pay you
  • give you payslips showing how much tax has been deducted
  • pay super contributions on your behalf (if you’re entitled to super).

If you begin work before a TFN, you have 28 days to get one and give it to your employer. After that, your employer must take tax from your pay at the highest rate if you don’t.

3. Superannuation

Superannuation (super) is money set aside to provide for your retirement during your working life. When starting a new job, you need to understand how super works and know your rights and entitlements.

Super money is paid in addition to your salary. If you’re eligible for super, your employer must pay super contributions into a super fund account. Most people can choose the super fund these contributions are paid into.

You must check your super regularly to ensure the correct super payments are made into your super account.

Your Tax Return

1. Who needs to prepare a tax return?

As an individual, you must lodge a tax return if:

  • you had tax taken out of your pay during the tax year (1 July to 30 June)
  • your taxable income (including some Australian Government payments) was over certain thresholds for residents
  • you are a foreign resident and earned $1 or more in Australia during the tax year (excluding income that had non-resident withholding tax withheld)
  • you are leaving Australia permanently or for more than one tax year.

We use information from your tax return, such as your income and the amount of tax you have paid, to work out if you need to pay extra tax or get money back (a tax refund).

2. Information you need to lodge

To lodge a tax return, you need to know:

  • how much income you have earned from working (including any cash payments), from interest on bank accounts or investments
  • how much tax has been withheld from your income (how much money is taken out of your pay by your employer and sent to us)
  • about any deductions and tax offsets, you are claiming.

Deductions are costs you can claim to reduce your tax. Most deductions are work-related expenses. That is money you have spent on something to help you earn your income. You must be able to show that:

  • the expenses directly related to earning income
  • the expenses are not private
  • you have a record to prove your expenses (such as a receipt).

Your employer needs to provide you with an income statement or payment summary. This shows how much income you earned and how much tax you paid.

3. Record Keeping

When you lodge your tax return, we process it and work out whether you have paid the right amount of tax. We will let you know the result by sending you a notice of assessment.

You must keep records, such as receipts, for any deductions you claim. You need to keep these records for at least five years from the date you lodge your tax return. We may ask you to show us these records.

myDeductions is a convenient way to keep your expense and income records in one place. Download the ATO app to your smart device and select the myDeductions icon.

Complete And Lodge Your Tax Return

1. When to lodge

You can lodge online using myTax, through a registered tax agent or complete a paper tax return. Your tax return covers the income year from 1 July to 30 June. Your tax return must be lodged, or you must engage a tax agent by 31 October.

When you lodge online with myTax or use a tax agent, we pre-fill your tax return with the information we already have—for example, employment income and bank interest. 

For most people, this will be ready by the end of July. However, waiting for us to pre-fill your information can make your tax return easier and more accurate.

We will pre-fill this information as we receive it, so you need to check the details are correct and add in anything missing.

2. Lodge online using myTax

happy young asian couple and realtor agent. cheerful young man s

Happy young Asian couple and realtor agent. Cheerful young man signing some documents while sitting at desk together with his wife. Buying new house real estate. Signing good condition contract.

You can lodge your tax return online using myTax. It is the quick, easy, safe and secure way to lodge online.

To use myTax, you first need to create a myGov account and link your account to ATO online services. We recommend you link before tax time (1 July) to ensure you receive all communications and no delays in lodging your tax return.

Once you have linked to ATO online services, you can access myTax to lodge your tax return.

3. Lodge using a registered tax agent

You can use a registered tax agent to prepare and lodge your tax return. You need to contact them before 31 October.

4. Help and support to lodge

At tax time, you can get free help with your tax. The Tax Help service is for people on incomes around $60,000 or less a year. 

If you need help completing your tax return, trained volunteers may help you. They provide a free and confidential service to help people complete their tax returns online using myTax.

Tax Help is in all capital cities and many other places in Australia from July to October each year.

FAQs

1. A friend told me about an investment he was interested in and suggested that I put some money in. He says we could make a large amount of money, but I think it sounds too good to be true.

You are wise to be cautious. Not all schemes are genuine and often promise large tax deductions that they say will be allowed by the tax office. So it is wise to check out any investment schemes before putting your money into them. 

If you invest in a risky tax scheme, you could lose some or all of your money, and you may have to pay back any refunds due to over-claimed deductions as well as interest and penalties. 

Before investing in any tax scheme, it is advisable to seek independent advice from a professional advisor and the tax office. 

Information and warnings about investment schemes and scams can be found on the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission SCAMwatch website.

2. Can all the interest from our joint accounts be declared in my wife’s tax return because her income is much lower than mine?

Each recipient must declare all income on the same basis as the accounts are held. Interest from a joint account must be split 50/50. You cannot declare it all on your wife’s tax return, and doing so could lead to an ATO audit.

3. My 14-year-old daughter has received $600 from a trust distribution. Does she have to lodge a tax return?

Yes, she will have to lodge a return. Before the 2012 income year, a minor could have earned up to $3,333 from investments before any income tax would be payable. 

However, from 1 July 2011, the Government removed the ability of minors to access the low-income rebate for unearned income (such as interest, dividends, rent, royalties, trust distributions etc.). This means that a minor who earns over $416 in unearned income must lodge an income tax return.

Personal exertion income (such as salary & wages) will still have tax payable, but the low-income tax offset can reduce that tax payable. However, unearned income will not attract the low-income rebate and be taxed at minors’ rates.

4. I have shared and received franked dividends this year but have no other income. Do I have to lodge a tax return to get the franking credits refunded?

You do not have to lodge a full tax return. Instead, you can complete the Refund of Franking Credits for Individuals form, which can be lodged by telephone or mailed to the ATO.

5. Do I need to declare my overseas pension?

In most cases, overseas pensions are taxable and, if you are an Australian resident, you will need to include the amount in your tax return. However, there are a few exceptions to this rule. 

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