Income tax in Australia
Encyclopedia
Income tax
in Australia is the most important revenue stream within the Australian taxation system
.
Income tax is levied upon three sources of income for individual taxpayers: personal earnings (such as salary and wages), business income and capital gains. Collectively these three sources of income tax account for 66% of federal government revenue and 57% of total revenue across the three tiers of government.
Income received by individuals is taxed at progressive rates, while income derived by companies is taxed at a flat rate of 30%. Generally, capital gains are only subject to tax at the time the gain is realised. Income tax is collected by the Australian Taxation Office
for the Government of Australia
.
In Australia the financial year runs from 1 July to 30 June of the following year.
Income tax is applied to the taxable income
of a taxable entity. Taxable income is calculated, in a broad sense, by applying allowable deductions against the income of a taxable entity.
was the first state to introduce an income tax. It took the form of a withholding tax on distributed income of companies. The tax was seen as necessary due to a fiscal crisis. For much the same reason, South Australia
followed suit in 1884. By 1907, all states had introduced an income tax.
. The current tax-free threshold is $6,000, and the highest marginal rate for individuals is 45%. In addition, most Australians are liable to pay the Medicare levy, of which the standard is 1.5% of taxable income. On 10 July 2011, the Gillard Government announced that it would increase the tax-free threshold to $18,200 on 1 July 2012 as part of the Clean Energy Future package, while reducing the Low Income Tax Offset to $300.
As with many other countries, income tax is withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit Tax File Number
(TFN) must be quoted to employers for employees to have withholdings calculated using the various tax brackets. While it is not an offence to fail to provide a bank or financial institution with a TFN, in the absence of this number, employers are required to withhold tax at the rate of 46.5% (the highest marginal rate plus Medicare levy) from the first dollar. Likewise, banks must also withhold the highest marginal rate of income tax on interest earned on bank accounts if the individual does not provide their TFN to the bank. In the same way, corporate and business taxpayers are required to provide their TFN or Australian Business Number
(ABN) to the bank, otherwise the bank will be required to withhold income tax at the highest rate of tax.
The above rates do not include the Medicare levy of 1.5%. For previous tax years, see individual income tax rates for prior years.
has been established for the financial year 2011-12.
Combined with the $1500 LITO (see above), children can earn up to $3,333 per year tax-free, and are not required to lodge tax returns for this amount.
Effective 1 July 2011 the LITO applies only to salaried income but not to investment income for minors.
Some children and some incomes are not affected by the children income rates and receive the normal rate. Such as full time/part time employment income.
system known as Pay-as-you-go
(PAYG). For employees with only a single job, the level of taxation at the end of the year is close to the amount due, before deductions are applied. Discrepancies and deduction amounts are declared in the annual income tax return and will be part of the refund which follows after annual assessment, or alternatively reduce the taxation debt that may be payable after assessment.
rate is a flat 30%, though through the dividend imputation
system Australian residents effectively do not pay this company income tax upon the profits distributed as dividends by Australian-resident corporations. When an Australian corporation pays corporate income tax, franking credits are generated and can then be applied to dividend payments at a maximum rate of 30 cents per dollar of dividend. Shareholders may then use these credits to offset their own personal income tax payable, including claiming a refund for excess credits left over after offsetting all payable income tax.
is part of the income tax system rather than a separate tax. Net capital gains (after concessions are applied) are included in a taxpayer's taxable income and taxed at marginal rates. Capital Gains applies to Individuals, Companies and any other entity which can legally own an asset. Trusts usually pass on their CGT (Capital Gains Tax) liability to their beneficiaries. Partners are taxed separately on the CGT made by partnerships.
In 1999 indexation on capital gains ceased and subsequently gains on assets held for more than one year are usually reduced by a discount of 50% for individuals, and 33% for superannuation funds. Due to inflation, a capital gains tax can be due even when no gain in purchasing power was achieved. However, in some cases where an indexed cost base applies (where an asset was acquired before indexation ceased) applying the old indexation rules gives a better tax result. Capital gains realised by companies are not discounted. Capital gains made by trust structures are usually taxed as if they were made in the hands of the ultimate beneficiary, though there are exceptions.
The disposal of assets which have been held since before 20 September 1985 (pre-CGT assets) is exempt from CGT.
on the wages outlay of employers. Typically the tax applies to all wages above a threshold. Groups of companies may be taxed as a single entity where their operations are significantly integrated or related.
Current Payroll Tax Rates and Thresholds
Some companies are eligible for deductions, concessions and exemptions.
There are two parts, FTB-A and FTB-B.
For FTB-A each family receives a payment for each child. In 2008/9 this was
These payments are reduced by 20% for total family income over $42,559 ($45,114 for 2010/11). It plateaus at roughly $1,300 per child until income over $94,000 is reached, at which point it is reduced by 30%.
FTB-B pays about $3,358 if the youngest child is under 5, $2,339 if 5..15. Only one payment for the youngest child is made. The payment is means tested on the income of the parent with the lower income, reducing by 20% for income over $4,526 ($4,745 for 2010/11).
Income is calculated more strictly for FTB purposes. For example, investment losses are considered to be income for the purpose of FTB, and salary sacrifice superannuation contributions are also counted as income.
There are other benefits related to this, for example the 2009 stimulus package included payments to those who received FTB-B.
The full system is more complex, and some information can be found on the websites of the Australian Tax Office, Centrelink, and the Family Assistance Office.
Contrary to the FTB's name, as from 1 July 2009 it will not be possible to claim FTB payments through the taxation system. All payments will be handled by Centrelink
.
ed benefits are additive, they can lead to a very high effective marginal tax rate
of tax.
For example, a person with children earning $95,000 could essentially be taxed 38% income tax plus 30% in loss of FTB-A, an effective marginal tax rate of 68%.
If their partner earned $7,000 then their partner could pay an effective marginal tax rate of 30% loss of FTB-A, plus 20% loss of FTB-B, giving a total of 50%.
If they earn $35,000 then their effective tax rate could be 30% income tax plus 30% loss of FTB-A plus 4% loss of low income rebate giving a total of 64%.
If other means tested allowances are payable (e.g. child care benefits, superannuation co-contribution, payments for a disability etc.) then the effective rate can be over 100%.
The means testing reflects a policy of targeting welfare to people in need.
However, some argue that this creates a work disincentive for middle class families.
Further, Australia’s means-tested tax and spending programs are extraordinarily complex.
Normal or ordinary proceeds from a business activity are classified as ordinary income. A business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Activities of a commercial nature that are carried on regularly and in an organised, systematic way, on a large scale or with view to profit will generally be considered to be a business activity. An activity which is not a business activity is more likely to be a hobby and income is not taxable. Other examples of business activities include illegal activities such as burglary, smuggling and illegal drug dealing and income from these activities is taxable.
Other forms of ordinary income include 'adventure or concern in the nature of trade', which is a single activity that is not part of a taxpayer's normal income earning activities however may be considered a business in itself. These can include generating a profit from a profit making scheme, and profit earnt from acitivities that go beyond the mere realisation of an asset in an enterprising manner. Income from investment or property is also classified as ordinary income and can include: rent from a lease, interest on a loan, dividends and royalties.
When assessing the amount of ordinary income, only the profits are counted based on a notional basis.
There are four tests to determine whether an individual is a resident for income tax purposes. An individual can be classified as a resident for taxation purposes if they are making contributions to a Commonwealth superannuation fund, in Australia for more than half the year, have their domicile or permanent place of abode in Australia or finally if they dwell permanently or for a considerable time in Australia.
A company will be considered an Australian resident for taxation purposes if it falls under any of the following three criteria: incorporated in Australia, central management and control is in Australia or if it is controlled by Australian resident shareholders.
There are other issues when considering residence in relation to the source of income. Personal exertion income is derived where the services are performed and for a profit making activity income is where the contract is performed. Property income is derived where the property is located, interest income where the money is lent and dividend income where the paying company is located.
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
in Australia is the most important revenue stream within the Australian taxation system
Taxation in Australia
There are many forms of taxation in Australia. Individuals and companies in Australia may be required to pay taxes or charges to all levels of government: local, state, and federal governments...
.
Income tax is levied upon three sources of income for individual taxpayers: personal earnings (such as salary and wages), business income and capital gains. Collectively these three sources of income tax account for 66% of federal government revenue and 57% of total revenue across the three tiers of government.
Income received by individuals is taxed at progressive rates, while income derived by companies is taxed at a flat rate of 30%. Generally, capital gains are only subject to tax at the time the gain is realised. Income tax is collected by the Australian Taxation Office
Australian Taxation Office
The Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
for the Government of Australia
Government of Australia
The Commonwealth of Australia is a federal constitutional monarchy under a parliamentary democracy. The Commonwealth of Australia was formed in 1901 as a result of an agreement among six self-governing British colonies, which became the six states...
.
In Australia the financial year runs from 1 July to 30 June of the following year.
Income tax is applied to the taxable income
Taxable income
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...
of a taxable entity. Taxable income is calculated, in a broad sense, by applying allowable deductions against the income of a taxable entity.
History
In 1880, TasmaniaTasmania
Tasmania is an Australian island and state. It is south of the continent, separated by Bass Strait. The state includes the island of Tasmania—the 26th largest island in the world—and the surrounding islands. The state has a population of 507,626 , of whom almost half reside in the greater Hobart...
was the first state to introduce an income tax. It took the form of a withholding tax on distributed income of companies. The tax was seen as necessary due to a fiscal crisis. For much the same reason, South Australia
South Australia
South Australia is a state of Australia in the southern central part of the country. It covers some of the most arid parts of the continent; with a total land area of , it is the fourth largest of Australia's six states and two territories.South Australia shares borders with all of the mainland...
followed suit in 1884. By 1907, all states had introduced an income tax.
Personal Income Tax
Income tax on personal income is a progressive taxProgressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
. The current tax-free threshold is $6,000, and the highest marginal rate for individuals is 45%. In addition, most Australians are liable to pay the Medicare levy, of which the standard is 1.5% of taxable income. On 10 July 2011, the Gillard Government announced that it would increase the tax-free threshold to $18,200 on 1 July 2012 as part of the Clean Energy Future package, while reducing the Low Income Tax Offset to $300.
As with many other countries, income tax is withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit Tax File Number
Tax File Number
Tax File Number is an 8 or 9 digit number issued by the Australian Taxation Office to each taxpayer to identify that taxpayer's Australian tax dealings. When it was introduced in 1988, individuals received a 9 digit TFN and non-individuals were issued an 8 digit TFN. Now both are issued 9 digit...
(TFN) must be quoted to employers for employees to have withholdings calculated using the various tax brackets. While it is not an offence to fail to provide a bank or financial institution with a TFN, in the absence of this number, employers are required to withhold tax at the rate of 46.5% (the highest marginal rate plus Medicare levy) from the first dollar. Likewise, banks must also withhold the highest marginal rate of income tax on interest earned on bank accounts if the individual does not provide their TFN to the bank. In the same way, corporate and business taxpayers are required to provide their TFN or Australian Business Number
Australian Business Number
The Australian Business Number, or ABN, is a unique identifier issued by the Australian Business Register which is operated by the Australian Taxation Office...
(ABN) to the bank, otherwise the bank will be required to withhold income tax at the highest rate of tax.
Individual income tax rates (residents)
Financial years 2010-11, 2011-12| Taxable income | Tax on this income | Effective tax rate |
|---|---|---|
| 0 – $6,000 | Nil | 0% |
| $6,001 – $37,000 | 15c for each $1 over $6,000 | 0 – 12.6% |
| $37,001 – $80,000 | $4,650 plus 30c for each $1 over $37,000 | 12.6 – 21.9% |
| $80,001 – $180,000 | $17,550 plus 37c for each $1 over $80,000 | 21.9 – 30.3% |
| $180,001 and over | $54,550 plus 45c for each $1 over $180,000 | 30.3 – 45% |
The above rates do not include the Medicare levy of 1.5%. For previous tax years, see individual income tax rates for prior years.
2011-12 Flood Levy
Due to the 2010-2011 Queensland floods an additional flood levyLevy
Levy, Lévy or Levies may refer to:* Levy * Levy's , Arizona chain* Levy County, Florida- Military organizations :* Aden Protectorate Levies* Iraq Levies* Kachin Levies* Malakand Levies* Swat Levies...
has been established for the financial year 2011-12.
| Taxable income | Flood levy on this income | Effective tax rate |
|---|---|---|
| $0 – $50,000 | Nil | 0% |
| $50,001 – $100,000 | $0.005 for each $1 over $50,000 | 0 - 0.25% |
| $100,001 and over | $250 plus $0.01 for each $1 over $100,000 | 0.25 - 1% |
Low Income Tax Offset
The Low Income Tax Offset (LITO) is a tax rebate for individuals on lower incomes. From 1 July 2010 it provides individuals earning less than $30,000 with a tax rebate of $1,500. The full offset is reduced by 4c for every dollar of taxable income above $30,000, meaning incomes greater than $67,500 do not receive any benefit. The LITO creates an effective tax-free threshold of $16,000 for low income earners. For the 2011-2012 tax year, 70% of the LITO entitlement is received as reduced withholding tax, the balance is received when a tax return is lodged.Income tax for Minors
Individuals under 18 years of age are taxed differently from adults.| Taxable income | Tax on this income | Effective Tax Rate |
|---|---|---|
| $0 – $416 | Nil | 0% |
| $416 – $1,307 | 66c for each $1 over $416 | 0 – 45% |
| $1,307 and over | 45% of total income | 45% |
Combined with the $1500 LITO (see above), children can earn up to $3,333 per year tax-free, and are not required to lodge tax returns for this amount.
Effective 1 July 2011 the LITO applies only to salaried income but not to investment income for minors.
Some children and some incomes are not affected by the children income rates and receive the normal rate. Such as full time/part time employment income.
Collection
Income tax is collected by means of a withholding taxWithholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
system known as Pay-as-you-go
Pay-as-you-go tax
Pay as you go is a system for businesses and individuals to pay installments of their expected tax liability on their income from employment, business, or investment for the current income year...
(PAYG). For employees with only a single job, the level of taxation at the end of the year is close to the amount due, before deductions are applied. Discrepancies and deduction amounts are declared in the annual income tax return and will be part of the refund which follows after annual assessment, or alternatively reduce the taxation debt that may be payable after assessment.
Company Tax
The company taxCorporate tax
Many countries impose corporate tax or company tax on the income or capital of some types of legal entities. A similar tax may be imposed at state or lower levels. The taxes may also be referred to as income tax or capital tax. Entities treated as partnerships are generally not taxed at the...
rate is a flat 30%, though through the dividend imputation
Dividend imputation
Dividend imputation is a corporate tax system in which some or all of the tax paid by a company may be attributed, or imputed, to the shareholders by way of a tax credit to reduce the income tax payable on a distribution...
system Australian residents effectively do not pay this company income tax upon the profits distributed as dividends by Australian-resident corporations. When an Australian corporation pays corporate income tax, franking credits are generated and can then be applied to dividend payments at a maximum rate of 30 cents per dollar of dividend. Shareholders may then use these credits to offset their own personal income tax payable, including claiming a refund for excess credits left over after offsetting all payable income tax.
Capital Gains Tax
Capital gains tax in AustraliaCapital gains tax in Australia
Capital gains tax in the context of the Australian taxation system applies to the capital gain made on disposal of any asset, except for specific exemptions. The most significant exemption is the family home...
is part of the income tax system rather than a separate tax. Net capital gains (after concessions are applied) are included in a taxpayer's taxable income and taxed at marginal rates. Capital Gains applies to Individuals, Companies and any other entity which can legally own an asset. Trusts usually pass on their CGT (Capital Gains Tax) liability to their beneficiaries. Partners are taxed separately on the CGT made by partnerships.
In 1999 indexation on capital gains ceased and subsequently gains on assets held for more than one year are usually reduced by a discount of 50% for individuals, and 33% for superannuation funds. Due to inflation, a capital gains tax can be due even when no gain in purchasing power was achieved. However, in some cases where an indexed cost base applies (where an asset was acquired before indexation ceased) applying the old indexation rules gives a better tax result. Capital gains realised by companies are not discounted. Capital gains made by trust structures are usually taxed as if they were made in the hands of the ultimate beneficiary, though there are exceptions.
The disposal of assets which have been held since before 20 September 1985 (pre-CGT assets) is exempt from CGT.
Payroll Tax
State governments in Australia levy a payroll taxPayroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
on the wages outlay of employers. Typically the tax applies to all wages above a threshold. Groups of companies may be taxed as a single entity where their operations are significantly integrated or related.
Current Payroll Tax Rates and Thresholds
| State | Annual Threshold | Tax Rate |
|---|---|---|
| New South Wales | $658,000 | 5.55% |
| Queensland | $1,000,000 | 4.75% |
| South Australia | $600,000 | 4.95% |
| Australian Capital Territory | $1,200,000 | 6.85% |
| Victoria | $550,000 | 4.95% |
| Western Australia | $750,000 | 5.50% |
| Tasmania | $1,010,000 | 6.10% |
Some companies are eligible for deductions, concessions and exemptions.
Family Tax Benefit
For families with dependent children the income tax system includes a supplementary set of rules known as Family Tax Benefits (FTB) that are applied in a more complex way by different departments. The benefits and thresholds vary depending on the number of children, and which of the married partners earns the additional income.There are two parts, FTB-A and FTB-B.
For FTB-A each family receives a payment for each child. In 2008/9 this was
| Value | Age |
|---|---|
| $4,631 | under 13 |
| $5,818 | 13..15 |
| $1,945 | 16..17 |
| $2,379 | 18..24 (if still dependent) |
These payments are reduced by 20% for total family income over $42,559 ($45,114 for 2010/11). It plateaus at roughly $1,300 per child until income over $94,000 is reached, at which point it is reduced by 30%.
FTB-B pays about $3,358 if the youngest child is under 5, $2,339 if 5..15. Only one payment for the youngest child is made. The payment is means tested on the income of the parent with the lower income, reducing by 20% for income over $4,526 ($4,745 for 2010/11).
Income is calculated more strictly for FTB purposes. For example, investment losses are considered to be income for the purpose of FTB, and salary sacrifice superannuation contributions are also counted as income.
There are other benefits related to this, for example the 2009 stimulus package included payments to those who received FTB-B.
The full system is more complex, and some information can be found on the websites of the Australian Tax Office, Centrelink, and the Family Assistance Office.
Contrary to the FTB's name, as from 1 July 2009 it will not be possible to claim FTB payments through the taxation system. All payments will be handled by Centrelink
Centrelink
Centrelink is the trading name of the Commonwealth Service Delivery Agency , a statutory authority responsible for delivering human services on behalf of agencies of the Commonwealth Government of Australia. The majority of Centrelink's services are the disbursement of social security payments...
.
Effective Marginal Tax Rates
Because reductions of means testMeans test
A means test is a determination of whether an individual or family is eligible for help from the government.- Canada :In Canada means tests are used for student finance , and "welfare" . They are not generally used for primary education and secondary education which are tax-funded...
ed benefits are additive, they can lead to a very high effective marginal tax rate
Effective marginal tax rate
The effective marginal tax rate is the combined effect on a person's earnings of income tax and the withdrawal of means testing of state welfare benefits...
of tax.
For example, a person with children earning $95,000 could essentially be taxed 38% income tax plus 30% in loss of FTB-A, an effective marginal tax rate of 68%.
If their partner earned $7,000 then their partner could pay an effective marginal tax rate of 30% loss of FTB-A, plus 20% loss of FTB-B, giving a total of 50%.
If they earn $35,000 then their effective tax rate could be 30% income tax plus 30% loss of FTB-A plus 4% loss of low income rebate giving a total of 64%.
If other means tested allowances are payable (e.g. child care benefits, superannuation co-contribution, payments for a disability etc.) then the effective rate can be over 100%.
The means testing reflects a policy of targeting welfare to people in need.
However, some argue that this creates a work disincentive for middle class families.
Further, Australia’s means-tested tax and spending programs are extraordinarily complex.
Legal Framework
Income tax is payable on assessable income, which falls under two broad categories: ordinary income (Income Tax Assessment Act 1997 (Cth) s 6-5)(ITAA97) and statutory income. (cite references)Ordinary Income
Ordinary income requires a benefit in money or money's worth. This can include for example the reduction in an existing liability. There must be a nexus with an income earning activity, such as income from personal exertion, from a profit making activity or from investment or property. In addition receipts that are of a capital nature, voluntary income and gifts are not classified as ordinary income.Normal or ordinary proceeds from a business activity are classified as ordinary income. A business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. Activities of a commercial nature that are carried on regularly and in an organised, systematic way, on a large scale or with view to profit will generally be considered to be a business activity. An activity which is not a business activity is more likely to be a hobby and income is not taxable. Other examples of business activities include illegal activities such as burglary, smuggling and illegal drug dealing and income from these activities is taxable.
Other forms of ordinary income include 'adventure or concern in the nature of trade', which is a single activity that is not part of a taxpayer's normal income earning activities however may be considered a business in itself. These can include generating a profit from a profit making scheme, and profit earnt from acitivities that go beyond the mere realisation of an asset in an enterprising manner. Income from investment or property is also classified as ordinary income and can include: rent from a lease, interest on a loan, dividends and royalties.
When assessing the amount of ordinary income, only the profits are counted based on a notional basis.
Residence
Residents of Australia for income tax purposes are subject to income tax on income from all sources, whereas non-residents for income tax purposes are only subject to income tax in Australia on their income from Australian sources.There are four tests to determine whether an individual is a resident for income tax purposes. An individual can be classified as a resident for taxation purposes if they are making contributions to a Commonwealth superannuation fund, in Australia for more than half the year, have their domicile or permanent place of abode in Australia or finally if they dwell permanently or for a considerable time in Australia.
A company will be considered an Australian resident for taxation purposes if it falls under any of the following three criteria: incorporated in Australia, central management and control is in Australia or if it is controlled by Australian resident shareholders.
There are other issues when considering residence in relation to the source of income. Personal exertion income is derived where the services are performed and for a profit making activity income is where the contract is performed. Property income is derived where the property is located, interest income where the money is lent and dividend income where the paying company is located.
See also
- Income taxIncome taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
- Constitutional basis of taxation in AustraliaConstitutional basis of taxation in AustraliaThe constitutional basis of taxation in Australia is based on a group of powers in the Australian Constitution: sections 51, section 90, section 53, section 55, and section 96...
- Taxation in AustraliaTaxation in AustraliaThere are many forms of taxation in Australia. Individuals and companies in Australia may be required to pay taxes or charges to all levels of government: local, state, and federal governments...