Income Tax in Australia
Income Tax in Australia...
Income tax in Australia 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 67% of federal government revenue and 55% of total revenue across the three tiers of government.
or ﬁnancial institution with a TFN, in the absence of this number, employers are required to withhold tax at the rate of 49% (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 Income received by individuals is taxed at progressive TFN or Australian Business Number (ABN) to the bank, rates, while income derived by companies is taxed at a otherwise the bank will be required to withhold income ﬂat rate of 30%. Generally, capital gains are only sub- tax at the highest rate of tax. ject to tax at the time the gain is realised. Income tax is collected by the Australian Taxation Oﬃce on belhalf of 2.1 Individual income tax rates (residents) The Commissioner of Taxation. 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 assessable income of a taxable entity.
Financial year 2012-13, 2013–14, 2014-15 The above rates do not include the Medicare levy of 1.5% (Medicare after July 1, 2014 is paid at 2%) Financial years 2010-11, 2011-12 The above rates do not include the Medicare levy of 1.5%. For previous tax years, see individual income tax rates for prior years.
Queensland introduced income tax in 1902 by the Income Tax Act of 1902.
2.2 2011-12 Flood Levy
Federal income tax was ﬁrst introduced in 1915, in order to help fund Australia’s war eﬀort in the First World Due to the 2010–2011 Queensland ﬂoods an additional levy was established for the ﬁnancial year 2011War. Between 1915 and 1942, income taxes were ﬂood   12. levied at both the state and federal level.
2.3 Low Income Tax Oﬀset
Personal Income Tax
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 $445. The full oﬀset is reduced by 1.5c for every dollar of taxable income above $37,000, meaning incomes greater than $66,647 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 on personal income is a progressive tax. The current tax-free threshold is $18,200, and the highest marginal rate for individuals is 47%. In addition, most Australians are liable to pay the Medicare levy, of which the standard is 2% 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 num- 2.4 Income tax for Minors ber (TFN) must be quoted to employers for employees to have withholdings calculated using the various tax brack- Individuals under 18 years of age are taxed diﬀerently ets. While it is not an oﬀence to fail to provide a bank from adults. 1
6 FAMILY TAX BENEFIT
Combined with the $445 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/parttime employment income.
Income tax is collected by means of a withholding tax 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.
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.
5 Payroll Tax State governments in Australia levy a payroll 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
Queensland and the Northern Territory payroll tax rates are eﬀective rates on payrolls above $5.5 million and $5.75 million respectively. All other jurisdictions levy The company tax rate is a ﬂat 30%, though through marginal rates. Some companies are eligible for deducthe dividend imputation system Australian residents only tions, concessions and exemptions. pay this company income tax once as shareholders of the company on the proﬁts distributed as dividends by Australian-resident corporations. Double taxation relief 6 Family Tax Beneﬁt on resident owners of resident corporations is common in other countries. When an Australian corporation pays For families with dependent children the income tax syscorporate income tax, franking credits are generated and tem includes a supplementary set of rules known as Famcan then be applied to dividend payments at a maximum ily Tax Beneﬁts (FTB) that are applied in a more comrate of 30 cents per dollar of dividend. Shareholders may plex way by diﬀerent departments. The beneﬁts and then use these credits to oﬀset their own personal income thresholds vary depending on the number of children, tax payable, including claiming a refund for excess credits and which of the married partners earns the additional left over after oﬀsetting all payable income tax. income.
There are two parts, FTB-A and FTB-B.
Capital Gains Tax
Capital gains tax in Australia 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
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 business activity. An activity which is not a business acreceived FTB-B. tivity is more likely to be a hobby and income is not taxThe full system is more complex, and some information able. Other examples of business activities include illecan be found on the websites of the Australian Tax Oﬃce, gal activities such as burglary, smuggling and illegal drug dealing and income from these activities is taxable. Centrelink, and the Family Assistance Oﬃce. 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 earned from activities that go beyond the mere realisation of an asset in an enterpris7 Eﬀective Marginal Tax Rates ing manner. Income from investment or property is also classiﬁed as ordinary income and can include: rent from Because reductions of means tested beneﬁts are additive, a lease, interest on a loan, dividends and royalties they can lead to a very high eﬀective marginal tax rate of When assessing the amount of ordinary income, only the tax. For example, a person with children earning $95,000 proﬁts are counted based on a notional basis. would be taxed at a marginal rate of 39% including medicare, and lose 30c per extra dollar earned from the FTB-A beneﬁt, an eﬀective marginal tax rate of 69%.  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.
If other means tested allowances are payable (e.g. child 8.2 Residence care beneﬁts, superannuation co-contribution, payments for a disability etc.) then the eﬀective rate can be over Residents of Australia for income tax purposes are sub100%. ject to income tax on income from all sources, whereas The means testing reﬂects a policy of targeting welfare to non-residents for income tax purposes are only subject to people in need. However, some argue that this creates a income tax in Australia on their income from Australian work disincentive for middle-class families. Further, sources. Australia’s means-tested tax and spending programs are There are four tests to determine whether an individual is extraordinarily complex. 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 superannua8 Legal Framework tion fund, in Australia for more than half the year, have their domicile or permanent place of abode in Australia Income tax is payable on assessable income, which falls or ﬁnally if they dwell permanently or for a considerable under two broad categories: ordinary income (Income time in Australia. Tax Assessment Act 1997 (Cth) s 6-5)(ITAA97) and A company will be considered an Australian resident for statutory income. (cite references) taxation purposes if it falls under any of the following three criteria: incorporated in Australia, carries on business in Australia and central management and control is 8.1 Ordinary Income in Australia or carries on business in Australian and it is controlled by Australian resident shareholders. Ordinary income requires a beneﬁt in money or money’s There are other issues when considering residence in reworth. This can include for example the reduction in an lation to the source of income. Personal exertion income existing liability. There must be a nexus with an income is derived where the services are performed and for a earning activity, such as income from personal exertion, proﬁt making activity income is where the contract is perfrom a proﬁt making activity or from investment or propformed. Property income is derived where the property erty. In addition receipts that are of a capital nature, volis located, interest income where the money is lent and untary income and gifts are not classiﬁed as ordinary individend income where the paying company is located. come. 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
9 See also • Constitutional basis of taxation in Australia
 “Income Tax Act of 1902 (2 Edw VII, No 10)". Queensland Historical Acts. Australasian Legal Information Institute. Retrieved 22 March 2014.  A brief history of Australia’s tax system Department of the Treasury  “What is the Medicare levy?". Medicare levy essentials. ATO. 30 June 2008. Retrieved 2009-03-09.  “Individual income tax rates”. Rates and calculators. ATO. 1 July 2014. Retrieved 2015-02-18.  “Individual income tax rates”. Rates and calculators. ATO. 5 July 2010. Retrieved 2011-07-08.  “Flood levy information for individuals”. Rates and calculators. ATO. 28 June 2011. Retrieved 2011-07-08.  Household Assistance Package - tax reforms: Lowincome tax oﬀset. Australia Taxation Oﬃce. Retrieved on 15 September 2012.  Income of individuals under the age of 18. Australian Taxation Oﬃce. Retrieved on 15 September 2012.  Australian Taxation Oﬃce website on PAYG withholding  “2012-13 Overview of State Taxes”. Western Australia Department of Treasury. Retrieved 2013-05-21.  “Rates and thresholds”. Payroll tax. NSW Government Oﬃce of State Revenue. Retrieved 2009-07-23.  “Payroll Tax in Queensland”. Payroll Tax. QLD Government Oﬃce of State Revenue. Retrieved 2012-08-31.  “General Information fact sheet” (PDF). Pay-roll Tax Forms and Brochures. Government of Western Australia Department of Treasury and Finance. Retrieved 201505-15.  “Rates and thresholds”. Retrieved 2011-04-23.   Australian Government, Family Assistance Oﬃce, How you can get paid  Based on ﬁgures from earlier sections in this article.  Andrew, Brian 2007. The contribution of eﬀective marginal tax rates to work disincentives.  Dockery, et. al. 2006 Welfare reform, housing assistance and eﬀective marginal tax rates  AMP. Trends in eﬀective marginal tax rates 1996-97 to 2006-07  Income Tax Assessment Act 1997 (Cth) s 995-1. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.  Income Tax Assessment Act 1997 (Cth) s 15-15. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.  Income Tax Assessment Act 1997 (Cth) s 6-5(2). Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
11 External links • Australian Income Tax Calculator (mobile compatible) • Australian Personal Income Tax Calculator
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