Australia income tax set up is a vast contributor for the government’s revenue generation. Every country has its own income tax structure depending upon set of rules set up by the government of that country to calculate and collect income from the residents.
The Australian tax system is a very significant body in generating revenues out of the citizens’ income tax payments.
A person or entity is taxable under 4 categories in an Australian system of income tax;
- Income generated through Personal earnings in the form of wages or salary
- Business income
- Capital gains
66% of federal government revenue is generated collectively from the above 3 resources of income tax. The three tier system of the government of Australia receives 57% contribution of the total revenue from the Australian income tax system. The fiscal year of Australia begins with 1st July and ends on 30th June of the next year, and the tax payment is calculated within this time line.
There are various deductions, allowances that need to be considered while calculating the taxable amount to be paid by a tax payer in Australia. There are some basic allowances granted to taxpayers against the taxpayer’s income.
The island state of Australia, Tasmania was the first state that started collecting income tax dating back to 1880 due to a financial crisis that had shaken up the island state TAS. Gradually the tax system has been spread all over Australia by 1907 as all states followed the same financial crunch.
Now let’s discuss the most three revenue generating aspects of income tax for the Australian income tax system;
Tax paid by a person on his personal income is known as a progressive tax. A progressive tax is described as the increased rate of tax according to the base of taxable amount. Income tax increases as the income range of a tax payer is increased. Low income range has a lower rate of tax to pay and higher income range includes a high income tax to pay the government.
The present taxable income range for an Australian tax payer is above $6,000 for the current financial year 2011-12.The maximum rate of income tax payable by Australians is 45% and most of them pay Medicare levy of 1.5% on taxable income.
In Australia the Gillard Government has announced to enhance the tax-free limit to $18,200 from 1st July 2012 as the Clean Energy Future package initiative on 10th July 2011. The low income tax offset is reduced $300 by the government of Australia.
Australia income tax system withholds income tax from the wages and salaries and sometimes refunds to the taxpayers. Every tax payer owns a Tax File Number or TFN which is a nine digit number used to withhold tax by his employer after calculating the taxable amount under the respective tax range. When a TFN is not given to the employer the tax is withheld at the highest rate plus the Medical levy and it amounts to 46.5% on the total income. Income tax is withheld at the same highest rate of 46.5%for incomes generated on interest earned on bank accounts as well as corporate and business tax payers if they don’t provide their TFN number to the bank.
The income tax rates for individuals vary with the income range;
Income above $6,000 is taxable in Australia for individuals during the financial year 2011-12. Here the Medicare levy is exempted.
|Taxable income||Rate of income tax||Tax on the income|
|$6001 – $37,000||0-12.6%||15c per $1 above $6,000|
|$37,001 – $80,000||12.6 – 21.9%||$4650 plus 30c per $1 above $37,000|
|$80,001 – $180,000||21.9 – 31.3%||$17,550 plus 37c per $1 above $80,000|
|$180,001 and above||30.3 – 45%||$54,550 plus 45c per $1 above 108,000|
The floods in Queensland forced to put an additional levy of 0-1% over the income group of $50,000 for the financial year 2011-2012.
- The income range of $50,001 to $100,000 comes under the tax range of 0-0.25%.
- 0.25 – 1% tax is applied to the income range $100,001 and above.
Individuals of a lower income group are entitled of a tax rebate from 1st July 2010, which is known as Low Income Tax Offset or LITO. $1,500 rebate is offered to individuals having an income below $30,000. Income taxes above $67,500 don’t have a LITO benefit. Lower income group individuals get a $16,000 threshold by LITO. 70% of the total LITO entitlement is the result of reduction in withheld tax in the financial year 2011-12 the rest amount is received upon lodging a tax return.
Children below the age of 18 pay tax under different schemes than the elders. The taxable income range is $416 to $1,307 with the tax rate being 0 – 45%. From 1st July 2011, children can earn tax free up to the limit of $3,333 per annum including $1500 LITO over a salaried income only.
The second type of Australian tax is company tax; the tax rate is a fixed 30% of the dividend received by an Australian resident. The Australian-resident companies distribute the profits to Australian residents in the form of dividends under a system called dividend imputation. This company taxation system is beneficial for the residents as they don’t have to undergo the double taxation mechanism over company profits.
Franking credits are generated for Australian corporations using dividend imputation, which is 30% of each dollar on the dividends payable. A company that pays its tax fully is entitled a 100% franking proportion.
Income tax in Australia includes Capital Gains Tax (CGT) under the basic income tax system. Tax on capital gains is not categorized as a different one in Australian income tax system. Necessary concessions are made on the capital gains. The net capital gains and taxable income of the taxpayer are combined together. Marginal tax rates are applied to the collective amount for taxation. Companies, individuals and other entities in legal ownership of an asset are subjected to pay Capital Gains in the Australia income tax system. Beneficiaries of trusts are liable to pay the capital gains tax whereas in a partnership these taxes are paid individually by each of the partner in the Australia income tax system.
At times of inflation, the CGT is due even if there is no gain from the business. After 1999 capital gain indexations are ceased for assets owned commonly beyond 1 year offering 50% discount for individuals and superannuation funds received a discount of 33%.
Companies don’t receive any discounts for their capital gains, but the beneficiary of a trust pays the CGT for the trust where the gains are taxed just like the beneficiary is responsible to earn it with certain exceptions.
For assets acquired before ceasing of indexation, the old indexation rules offer better outcomes for the tax payer under the Australian system of income tax. Assets owned before September 20th 1985 are exempted from CGT.
The Australian tax system has a mode of collecting tax from the employers with a varying tax range under the State governments. This is known as Payroll tax, charged over the wages paid to employees. This is even known as withholding tax, as the employer withholds the tax payable by the employees. The tax rate and annual threshold change for each state. For Groups of companies having a set of finely integrated companies has to pay only tax once just like a single company, rather than paying it separately for each of the companies. Few companies enjoy the benefits of exemption, deductions and concessions under payroll tax.
The current threshold and rate for Payroll tax are as follows:
|State||Rate of Payroll tax||Threshold|
|Australian capital territory||6.85%||$1,200,000|
|New South Wales||5.55%||$658,00|
Family Tax Benefits (FTB) is for the benefit of families having dependent children. The application of FTB in income tax system of Australia is a very complicated process for different departments. The number of children and which of the parent earns less in a family are taken into account and the threshold of FTB varies accordingly. Families can avail FTB in two parts FTB-A and FTB-B.
In the financial year 2008-09 FTB-A for each family was
- For children under 13, a sum of $4,631 is offered as FTB
- Children between the age group 13 – 15 attracted $5,818
- For 16 – 17 year olds it was $1,945
- Dependent children between18-24 entitled the parents to get $2,379 FTB-A.
Families having a total income more than $42,559 get reduced payments by 20%. It was $45,114 in the year 2010-11. Till the income is reached over $94,000 the FTB continues to be the same approximately around $1,300, then the reduction is done by 30%.
FTB-B is paid only once for the youngest child of a family. FTB is calculated the low earning parent of the child and for an income above $4,526 it is reduced by 20%.
- For the youngest child below 5 is nearly $3,358.
- For a 5-15 year old child it is $2,339.
Websites of the Australian Tax Office, Family Assistance Office and Centre link can offer more information about different taxation methods of the Australia income tax system.
The Australian income tax system dates back to 1907 and Tasmania was the first state of Islands that has introduced the income tax system after a recession in 1880.
Income tax rate in Australia is different for each category of income tax collected. Let’s get a more elaborate idea about the income tax types and their respective rates charged to residents.
Australian tax payment system enables every taxpayer to have a Tax File Number (TFN). The TFN is used by an employer to withhold the tax payable from their wages and salaries. If an employee fails to submit a TFN the maximum rate of interest is applied for income tax with the Medicare levy along with it. So the total tax rate increases to 45% plus 1.5%, a massive 46.5% of the total income by the employee.
The basic 4 types of income taxes are levied on the residents in Australia are;
- Personal Income Tax
- Capital Gains Tax
- Company Tax
- Payroll Tax
Personal income tax rate in the Australian tax system increases along with the increasing taxable income range of the residents. An income up to $6,000 is tax free and anything above it attracts the respective rate of income task specified for that range. The maximum income tax rate in Australia at present is 45%. An additional Medicare levy of 1.5% is added to the personal income tax making the highest rate of interest 46.5% which is very high compared to other countries.
The rate of income tax in Australia for the current financial year is as follows;
|Taxable income||Rate of income tax||Tax on the income|
|$6001 – $37,000||
|15c per $1 above $6,000|
|$37,001 – $80,000||
12.6 – 21.9%
|$4650 plus 30c per $1above $37,000|
|$80,001 – $180,000||
21.9 – 31.3%
|$17,550 plus 37c per $1above $80,000|
|$180,001 and above||
30.3 – 45%
|$54,550 plus 45c per $1above 108,000|
A simple example to make the above table understandable; if the personal income of a resident is $65,00 the income tax rate for him would be between 0 – 12%. He has to pay 15c x 500 = 7500c, which is $7.5 the amount on his income.
No marginal amount is assigned for income up to the $37,000 threshold. After the said limit a minimum amount of money is fixed for paying the tax along with an additional 30c for each dollar above $37,000.
Every range of income tax in Australia has a different fixed amount plus certain cents per dollar within that specific tax group.
Natural calamities sometimes impose some new rates of income tax in Australia, like the Queensland floods which has forced the residents to pay an additional tax at the rate of 0-1% depending on their income group. The figures show;
|Taxable income||Effective tax rate||Flood levy on this income|
|$0 – $50,000||0%||Nil|
|$50,000 – $100,000||0 – 0.25%||$0.005 for each $ above $50,000|
|$100,001 and above||0.25 – 1%||$250 along with $0.01 per dollar above $100,000|
Minors also pay tax for their earnings, but the Australian income tax rate is different for children below 18 than the adult taxpayers;
|Income range||Rate of income tax|
|$ – $416||0%|
|$416 – $1,307||0 – 45%|
|$1,307 and above||45%|
Children can earn up to a tax free amount of $3,333 by combining the income with LITO. Income from a full time or part time employment by a child receives the normal tax rate of adults rather than the children income tax rates. LITO is not meant for interests earned from investments income done for a minor, only salaried income comes under this category from 1st July 2011.
The Company Tax rate of Australia is a flat 30% on the dividends earned by the residents. This rate is fixed with the dividend imputation system, where the Australian residents pay income tax over only the dividends, having the profit with themselves. During the payment of corporate income taxes by the Australian corporation franking credits are generated that are utilized to pay dividends.
Capital gains tax (CGT) in Australia is not a different tax system it is a part of the Australia income tax system. A marginal rate is applied on net capital gains for tax payers after necessary concessions are made. Trusts, companies, individuals or any entity that can own an asset can be levied with a capital gains tax.
To avail a 50% discount on capital gain tax a property has to be owned by an individual, trust or a for a complete year excluding sale and purchase date. 33% of discount is offered to superannuation entities under the Australian income tax system. The property doesn’t get any discounts if owned by a company.
The payroll tax is different for each state of Australia. Payroll tax of Australia is the tax charged on an employer over the wages he pays to employees. The employer withholds the tax payable by an employee. Group of companies doing business with numbers of integrated companies are liable to pay the payroll tax as a single entity rather than paying it for each of their small companies separately. Some of the companies are entitled with exemption, concession or deductions in payroll tax.
The payroll tax rates are shown below:
|Rate of Payroll tax||Threshold|
|New South Wales||5.55%||$658,00|
|Australian capital territory||6.85%||$1,200,000|
Payroll taxes would change for each state and the income limits, as every state has its own rate of payroll tax and income group.
Family Tax Benefits (FTB) is a part of income tax system in Australia where families get some discounts on tax payment if the earning couples have dependent children with them. If a family is having more than $42,559 as its total income 20% reduction is applied on the income tax payable. 30% reduction is applied when the income crosses $94,000 threshold.