Australian Tax System

Australia's tax system is administered by the Australian Taxation Office (ATO). The federal government collects income tax, with no state-level income taxes. However, Australia's superannuation system creates a parallel retirement savings structure with its own tax rules, and GST adds another layer to business taxation.

Tax Administration

Australian Taxation Office (ATO) is the principal federal revenue collection body. Administers income tax, GST, superannuation compliance, and other federal taxes.

Tax File Number (TFN): Unique identifier for tax purposes. Required for employment, banking, and investments. Without TFN, higher withholding rates apply.

Self-assessment system: Taxpayers lodge returns declaring income and claiming deductions. ATO data-matching programs compare returns against third-party information (employers, banks, share registries).

Financial year: July 1 to June 30 (opposite to calendar year). Returns due October 31 for self-lodgers, extended deadlines for tax agent-prepared returns.

myGov and ATO online: Most individuals interact with ATO through linked myGov account. Pre-filled information from employers and financial institutions reduces data entry.

Residency and Tax Obligations

Residency determines the scope of Australian tax obligations:

Residents: Taxed on worldwide income. Entitled to tax-free threshold and various offsets. Residency is a facts-and-circumstances test considering domicile, presence, and ties to Australia.

Non-residents: Taxed only on Australian-sourced income. No tax-free threshold. Different (generally higher) rates apply.

Working holiday makers: Special tax rates apply regardless of residency status. Employers must withhold at specific rates.

Temporary residents: Taxed on Australian income plus foreign employment income, but not on foreign investment income. Superannuation implications differ.

Income Tax Basics

Tax-free threshold: Residents pay no tax on income below threshold. Progressive rates apply above that. Non-residents pay from first dollar.

Marginal rates: Income divided into brackets with increasing rates. Medicare levy adds to effective rate for most taxpayers. Higher earners may also pay Medicare levy surcharge if without private hospital cover.

Tax offsets: Reduce tax payable (similar to credits elsewhere). Include low-income offset, low and middle income offset (when applicable), seniors offset, private health insurance rebate.

PAYG withholding: Employers withhold tax from wages based on declared tax-free threshold claim and expected annual earnings. Similar to PAYE systems elsewhere.

PAYG instalments: Self-employed and those with investment income may need to pay quarterly instalments based on prior year income or current year estimates.

Superannuation

Superannuation ("super") is Australia's compulsory retirement savings system:

Superannuation Guarantee (SG): Employers must contribute a percentage of ordinary time earnings to employee's super fund. Rate has been increasing and is set to continue rising.

Concessional contributions: Employer contributions and salary-sacrificed amounts are taxed at 15% in the fund (much lower than marginal rates for most workers). Annual cap applies; excess taxed at marginal rate.

Non-concessional contributions: After-tax contributions not taxed again when contributed. Higher annual cap, plus bring-forward rule allowing three years' cap in one year. Excess contributions taxed heavily.

Preservation: Super generally cannot be accessed until preservation age (varies by birth year) and meeting a condition of release (retirement, reaching age 65, etc.). Early access limited to severe financial hardship, compassionate grounds, or terminal illness.

Tax on earnings: Investment earnings in accumulation phase taxed at 15%. Capital gains on assets held over 12 months get one-third discount.

Pension phase: Once in retirement pension phase, earnings are tax-free (up to transfer balance cap). Provides powerful tax incentive to keep funds in super.

Division 293 tax: Higher earners pay additional 15% tax on concessional contributions, bringing total to 30%. Still advantageous compared to marginal rates above this threshold.

Capital Gains Tax (CGT)

Australia taxes capital gains as part of income:

CGT discount: Individuals and trusts holding assets over 12 months get 50% discount on gains (only half the gain is assessable). Super funds get one-third discount. Companies get no discount.

Cost base: Original cost plus incidental acquisition costs, non-capital costs of ownership, and capital improvement costs. Indexed for assets held before introduction of discount rules if advantageous.

Main residence exemption: Gain on home generally fully exempt if used as main residence throughout ownership. Partial exemption for income-producing periods. Six-year absence rule allows temporary renting.

Losses: Capital losses offset only capital gains, not other income. Carried forward indefinitely until gains arise.

CGT events: Many events beyond sale trigger CGT (gifts, creating trusts, certain insurance events, foreign resident ceasing to be Australian resident). Not just when money changes hands.

Goods and Services Tax (GST)

GST is a 10% value-added tax on most goods and services:

Registration threshold: Businesses must register when turnover exceeds threshold. Registered businesses charge GST and claim input tax credits on business purchases.

GST-free supplies: Some items are GST-free (not same as exempt): basic food, health services, education, exports, certain religious services. Business can still claim input credits on costs.

Input-taxed supplies: Financial services, residential rent, some insurance. Can't claim input credits on related costs. Different from GST-free.

Business Activity Statement (BAS): Registered businesses lodge BAS (monthly, quarterly, or annually) reporting GST collected, claimed, and net amount. Also reports PAYG withholding and instalments.

Deductions

Work-related deductions reduce assessable income:

Direct connection required: Expense must directly relate to earning assessable income. Private expenses not deductible. Apportionment required for mixed-purpose expenses.

Common deductible expenses: Work-related travel (not ordinary commuting), uniforms and protective clothing, self-education relating to current work, home office expenses, tools and equipment, union fees, income protection insurance premiums.

Working from home: Specific methods for calculating deduction (fixed rate per hour or actual cost). Records required for actual cost method. ATO scrutinises these claims.

Motor vehicle expenses: Two methods—cents per kilometre (capped at 5,000km) or logbook method. Logbook requires representative 12-week record keeping.

Substantiation: Most deductions require written records (receipts, invoices). Small expenses rule has limited application. ATO data-matching identifies unusually high claims.

Common Australian-Specific Situations

Negative gearing: Investment losses (especially rental property) offset other income. Controversial but established feature of Australian tax. Interest deductibility makes borrowing to invest tax-effective.

Franked dividends: Australian companies pay tax on profits. Dividends carry franking credits representing tax paid. Shareholders include grossed-up dividend in income, then claim credit for tax paid. If credits exceed liability, excess may be refunded.

HECS-HELP debt: Student loans repaid through tax system when income exceeds threshold. Compulsory repayment calculated as percentage of repayment income. Not a deduction; it's repayment of debt.

Private health insurance: Rebate on premiums (income-tested, delivered as reduced premium or refundable offset). Medicare levy surcharge applies to higher earners without appropriate hospital cover.

Trust distributions: Family trusts common in Australia for asset protection and income splitting. Complex rules around distributions, streaming of capital gains and franked dividends, and family trust elections.

Spouse contributions: Contributing to low-income spouse's super may generate tax offset. Income threshold for receiving spouse applies.

State Taxes

While income tax is federal, states impose other taxes:

Stamp duty: State tax on property transfers, vehicle registrations, and some other transactions. Significant cost on property purchases. First home buyer concessions vary by state.

Land tax: Annual state tax on land holdings above threshold (main residence usually exempt). Assessed on unimproved land value.

Payroll tax: State tax on employer wage bills above threshold. Rates and thresholds vary by state. Adds to employment costs for larger businesses.

These state taxes operate independently of the federal system and ATO.