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.

Income received by individuals is taxed at progressive rates from 0 to 45%, plus a Medicare levy of up to 2%, while income derived by companies is taxed at a flat rate of either 30% or 27.5% depending on annual turnover. Generally, capital gains are only subject to tax at the time the gain is realised and are reduced by 50%. Income tax is collected by the Australian Taxation Office.

In Australia the financial year runs from 1 July to 30 June of the following year. Income tax is applied to a taxpayer's taxable income, which is calculated, in a broad sense, by applying allowable deductions against the taxpayer's assessable income.

History

Queensland introduced income tax in 1902 by the Income Tax Act of 1902.[1]

Federal income tax was first introduced in 1915, in order to help fund Australia’s war effort in the First World War.[2] Between 1915 and 1942, income taxes were levied by both State and federal governments.[2] In 1942, to help fund World War II, the federal government took over the raising of all income tax, to the exclusion of the States.

Historical personal income tax rates and brackets

The following historical personal income tax rates and brackets since 1983 are sourced from the ATO.[3] These rates do not include the Medicare levy.

The above rates do not include the Flood Levy introduced by the Gillard Labor Government as a result of the 2010–11 Queensland floods.

The above rates do not include the Temporary Budget Repair Levy introduced by the Abbott Liberal Government.
This levy was payable at a rate of 2% for taxable incomes over $180,000.[4]

The above rates do not include the Temporary Budget Repair Levy.
This levy was payable at a rate of 2% for taxable incomes over $180,000.

The above rates do not include the Temporary Budget Repair Levy.
This levy was payable at a rate of 2% for taxable incomes over $180,000 and expired on 1 July 2017.
In October 2016, the federal government passed a bracket adjustment that raised the third marginal tax rate threshold from $80,000 to $87,000. These changes took effect from 1 July 2016.[5]

Personal income tax

In Australia, income tax on personal income is a progressive tax. The rates for resident individual taxpayers is different to non-resident taxpayers (see below). The current tax-free threshold for resident individuals is $18,200, 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 2% of taxable income.[6]

As with many other countries, income tax is withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. An employee must quote to employers their Tax File Number (TFN) so the employer can withhold tax from their pay. While it is not an offence to fail to provide an employer, a bank or financial institution with a TFN, in the absence of this number, payers are required to withhold tax at the rate of 47% (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 them with a TFN. 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 is required to withhold income tax at the highest rate of tax.

Individual income tax rates (residents)

Financial year 2017–18[7]

The rates for residents are:

Taxable income Tax on this income Effective tax rate
$1 – $18,200 Nil 0%
$18,201 – $37,000 19c for each $1 over $18,200 0 – 9.65%
$37,001 – $87,000 $3,572 plus 32.5c for each $1 over $37,000 9.65 – 22.78%
$87,001 – $180,000 $19,822 plus 37c for each $1 over $87,000 22.78 – 30.13%
$180,001 and over $54,232 plus 45c for each $1 over $180,000 30.13 – less than 45%

The above rates do not include:

They are also subject to the low income tax offset.

The temporary budget repair levy, which was introduced by the Abbott Liberal Government in financial year 2014-15 and payable at a rate of 2% for incomes over $180,000, ceased to apply from 1 July 2017.[8]

Low income tax offset

The Low Income Tax Offset (LITO) is a tax rebate for Australian-resident individuals on lower incomes. For 2015-16, in addition to the tax-free threshold of $18,200, the LITO is $445 until the individual's taxable income reaches $37,000. The LITO is then reduced by 1.5c for every dollar of taxable income above $37,000, and cuts out when taxable income reaches $66,667.[9] The LITO reduces an individual's tax liability but is not refundable when the liability reaches zero, and does not reduce the Medicare levy. The LITO is calculated automatically by the ATO when a tax return is lodged.

Income tax for minors

Individuals under 18 years of age are taxed differently from adults. This rate does not apply to "excepted" income, which includes employment income and inheritances.[10]

Taxable income Tax on this income Effective Tax Rate
$1 – $417 Nil 0%
$417 – $1,307 65c for each $1 over $416 0 – 45%
$1,308 and over 45% of total income 45%

Individual income tax rates (non-residents)

Financial year 2016-17[11]

Taxable income Tax on this income Effective tax rate
$1 – $87,000 32.5c for each $1 32.5%
$87,001 – $180,000 $28,275 plus 37c for each $1 over $87,000 32.5 – 34.8%
$180,001 and over $62,685 plus 45c for each $1 over $180,000 34.8 – less than 45%

The Medicare levy does not apply to non-residents, and a non-resident is not entitled to the low income tax offset.

The rates have been unchanged since 2012-13. For prior tax years, see individual income tax rates for non-residents of prior years.

Collection

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.[12]

Company tax

The top company tax rate is 30%, though through the dividend imputation system Australian residents only pay this company income tax once as shareholders of the company on the profits distributed as dividends by Australian-resident corporations. Double taxation relief on resident owners of resident corporations is common in other countries. 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 franking credits left over after offsetting all payable income tax.

Since 1 July 2016, "small business entities" with aggregated annual turnover of less than $10 million have had a reduced company tax rate of 27.5%.[13]

Capital gains tax

Capital gains tax (CGT) in Australia is part of the income tax system rather than a separate tax.[14] Capital gains tax was introduced by the Hawke Labor Government in September 1985 and allowed for indexation of the cost base of the capital asset to the Consumer Price Index, to account for annual price inflation.

Net capital gains (after concessions are applied) are included in a taxpayer's taxable income and are 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 liability to their beneficiaries. Partners are taxed separately on the CGT made by partnerships.

In 1999, the Howard Liberal Government legislated to end the practice of cost base indexation (using the Consumer Price Index) on capital gains as a result of purchases made after 11.45am (by legal time in the ACT) on 21 September 1999.[15] This simplified calculation of capital gains and losses.

The Howard Liberal Government replaced cost base indexation with the allowance for a simple discount to apply to gains on capital assets held for more than twelve months (one year). The discount is 50% for individuals, and 33 1/3% for complying superannuation funds.[16]

Due to this change in calculation of capital gains, capital gains tax can now be owed because of inflation, 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 11.45am (by legal time in the ACT) on 21 September 1999) 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 (when capital gains tax went into effect), are exempt from CGT.

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[17]

State Annual Threshold Tax Rate
New South Wales[18] $750,000 5.45%
Queensland[19] $1,100,000 4.75%
South Australia $600,000 4.95%
Australian Capital Territory $1,750,000 6.85%
Victoria[20] $575,000 4.85%
Western Australia[21] $750,000 5.50%
Tasmania[22] $1,010,023 6.10%
Northern Territory[23] $1,500,000 5.50%

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 marginal rates. 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.[24] All payments will be handled by Centrelink.

Effective marginal tax rates

Because reductions of means tested 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 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%. [25]

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%.[26]

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.[27] Further, Australia’s means-tested tax and spending programs are extraordinarily complex.[28]

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.[29] 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,[30] and profit earned from activities 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

A resident for tax purposes is subject to income tax on income from all sources,[31] whereas non-residents for 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:

A company will be considered an Australian resident for taxation purposes if it falls under any of the following three criteria:

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

References

  1. ↑ "Income Tax Act of 1902 (2 Edw VII, No 10)". Queensland Historical Acts. Australasian Legal Information Institute. Retrieved 22 March 2014.
  2. 1 2 A brief history of Australia’s tax system Department of the Treasury
  3. ↑ "Individual income tax rates for prior years". Australian Taxation Office. 22 Jun 2016.
  4. ↑ "Temporary budget repair levy". Australian Taxation Office. 21 July 2014.
  5. ↑ "Individual income tax rates". Australian Taxation Office. 9 December 2016. The Government has announced that from 1 July 2016, for individual taxpayers, the marginal tax rate of 37 per cent starts at $87,000 instead of the previous $80,000. This new threshold also applies to foreign residents and working holiday makers.
  6. ↑ "What is the Medicare levy?". Medicare levy essentials. ATO. 30 June 2008. Archived from the original on 29 June 2013. Retrieved 2009-03-09.
  7. ↑ "Individual income tax rates". Individual income tax rates. ATO. 22 June 2016. Retrieved 2016-06-28.
  8. ↑ "Temporary budget repair levy". Australian Taxation Office. 29 June 2017.
  9. ↑ Low-income tax offset. Australia Taxation Office. Retrieved on 15 September 2012.
  10. ↑ Income of individuals under the age of 18. Australian Taxation Office. Retrieved on 15 September 2012.
  11. ↑ "Tax rates – foreign resident". Rates and calculators. ATO. 22 June 2016. Retrieved 2016-07-03.
  12. ↑ Australian Taxation Office website on PAYG withholding
  13. ↑ "Reducing the corporate tax rate". Australian Taxation Office. 4 July 2017.
  14. ↑ "Capital gains tax". Australian Taxation Office. 17 February 2016. You pay tax on your capital gains. It forms part of your income tax and is not considered a separate tax – though it's referred to as capital gains tax (CGT).
  15. ↑ "Working out your capital gain". Australian Taxation Office. 21 June 2016.
  16. ↑ "Working out your capital gain". Australian Taxation Office. 21 June 2016.
  17. ↑ "2012-13 Overview of State Taxes". Western Australia Department of Treasury. Retrieved 2013-05-21.
  18. ↑ "Rates and thresholds". Payroll tax. NSW Government Office of State Revenue. Retrieved 2009-07-23.
  19. ↑ "Payroll Tax in Queensland". Payroll Tax. QLD Government Office of State Revenue. Retrieved 2012-08-31.
  20. ↑ "Payroll Tax". State Revenue Office. Retrieved 3 May 2016.
  21. ↑ "General Information fact sheet" (PDF). Pay-roll Tax Forms and Brochures. Government of Western Australia Department of Treasury and Finance. Retrieved 2015-05-15.
  22. ↑ "Rates and thresholds". Retrieved 2011-04-23.
  23. ↑
  24. ↑ Australian Government, Family Assistance Office, How you can get paid
  25. ↑ Based on figures from earlier sections in this article.
  26. ↑ Andrew, Brian 2007. The contribution of effective marginal tax rates to work disincentives.
  27. ↑ Dockery, et. al. 2006 Welfare reform, housing assistance and effective marginal tax rates
  28. ↑ AMP. Trends in effective marginal tax rates 1996-97 to 2006-07
  29. ↑ Income Tax Assessment Act 1997 (Cth) s 995-1. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
  30. ↑ Income Tax Assessment Act 1997 (Cth) s 15-15. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
  31. ↑ Income Tax Assessment Act 1997 (Cth) s 6-5(2). Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
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