Income tax in Australia

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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.[citation needed]

Income received by individuals is taxed at progressive rates, while income derived by companies are 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 assessable income of a taxable entity.

History[edit]

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 at both the state and federal level.[2]

Personal Income Tax[edit]

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 45%. In addition, most Australians are liable to pay the Medicare levy, of which the standard is 2% of taxable income.[3] 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.

Individual income tax rates (residents)[edit]

Financial year 2012-13, 2013-14[4]

Taxable income Tax on this income Effective tax rate
0 – $18,200 Nil 0%
$18,201 – $37,000 19c for each $1 over $18,200 0 – 9.7%
$37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000 9.7 – 21.9%
$80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000 21.9 – 30.3%
$180,001 and over $54,547 plus 45c for each $1 over $180,000 30.3 – 44.9%

The above rates do not include the Medicare levy of 1.5%

Financial years 2010-11, 2011-12[5]

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 – less than 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[edit]

Due to the 2010–2011 Queensland floods an additional flood levy was established for the financial year 2011-12.[6]

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 - less than 1%

Low Income Tax Offset[edit]

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 1.5c for every dollar of taxable income above $37,000, meaning incomes greater than $66,647 do not receive any benefit.[7] 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.

The Low Income Tax Offset was cut to $445 for the tax year 2012-2013 and $300 for subsequent years.

Income tax for Minors[edit]

Individuals under 18 years of age are taxed differently from adults.[8]

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

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.[9]

Company Tax[edit]

The company tax rate is a flat 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 credits left over after offsetting all payable income tax.

Capital Gains Tax[edit]

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 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[edit]

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[10]

State Annual Threshold Tax Rate
New South Wales[11] $750,000 5.45%
Queensland $1,100,000[12] 4.75%
South Australia $600,000 4.95%
Australian Capital Territory $1,750,000 6.85%
Victoria $550,000 4.90%
Western Australia[13] $750,000 5.50%
Tasmania[14] $1,010,023 6.10%

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[edit]

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.[15] All payments will be handled by Centrelink.

Effective Marginal Tax Rates[edit]

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 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%.[16]

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%.[17]

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.[18] Further, Australia’s means-tested tax and spending programs are extraordinarily complex.[19]

Legal Framework[edit]

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[edit]

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.[20] 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,[21] 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[edit]

Residents of Australia for income tax purposes are subject to income tax on income from all sources,[22] 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, carries on business in Australia and central management and control is in Australia or carries on business in Australian and 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[edit]

References[edit]

  1. ^ "Income Tax Act of 1902 (2 Edw VII, No 10)". Queensland Historical Acts. Australasian Legal Information Institute. Retrieved 22 March 2014. 
  2. ^ a b A brief history of Australia’s tax system Department of the Treasury
  3. ^ "What is the Medicare levy?". Medicare levy essentials. ATO. 30 June 2008. Retrieved 2009-03-09. [dead link]
  4. ^ "Individual income tax rates". Rates and calculators. ATO. 1 July 2012. Retrieved 2012-07-01. 
  5. ^ "Individual income tax rates". Rates and calculators. ATO. 5 July 2010. Retrieved 2011-07-08. 
  6. ^ "Flood levy information for individuals". Rates and calculators. ATO. 28 June 2011. Retrieved 2011-07-08. 
  7. ^ Household Assistance Package - tax reforms: Low-income tax offset. Australia Taxation Office. Retrieved on 15 September 2012.
  8. ^ Income of individuals under the age of 18. Australian Taxation Office. Retrieved on 15 September 2012.
  9. ^ Australian Taxation Office website on PAYG withholding
  10. ^ "2012-13 Overview of State Taxes". Western Australia Department of Treasury. Retrieved 2013-05-21. 
  11. ^ "Rates and thresholds". Payroll tax. NSW Government Office of State Revenue. Retrieved 2009-07-23. 
  12. ^ "Payroll Tax in Queensland". Payroll Tax. QLD Government Office of State Revenue. Retrieved 2012-08-31. 
  13. ^ "General Information fact sheet". Pay-roll Tax Forms and Brochures. Government of Western Australia Department of Treasury and Finance. Retrieved 2010-04-18. [dead link]
  14. ^ "Rates and thresholds". Retrieved 2011-04-23. 
  15. ^ Australian Government, Family Assistance Office, How you can get paid
  16. ^ Based on figures from earlier sections in this article.
  17. ^ Andrew, Brian 2007. The contribution of effective marginal tax rates to work disincentives.
  18. ^ Dockery, et. al. 2006 Welfare reform, housing assistance and effective marginal tax rates
  19. ^ AMP. Trends in effective marginal tax rates 1996-97 to 2006-07
  20. ^ Income Tax Assessment Act 1997 (Cth) s 995-1. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
  21. ^ Income Tax Assessment Act 1997 (Cth) s 15-15. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
  22. ^ Income Tax Assessment Act 1997 (Cth) s 6-5(2). Commonwealth Consolidated Acts. Retrieved on 15 September 2012.

External links[edit]