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 nancial 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 rst 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
at 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 Oce on belhalf of
2.1 Individual income tax rates (residents)
The Commissioner of Taxation.
In Australia the nancial 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, 201314, 2014-15[4]

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[5]
The above rates do not include the Medicare levy of
1.5%. For previous tax years, see individual income tax
rates for prior years.

History

Queensland introduced income tax in 1902 by the Income

Tax Act of 1902.[1]

2.2 2011-12 Flood Levy

Federal income tax was rst introduced in 1915, in order to help fund Australias war eort in the First World Due to the 20102011 Queensland oods an additional
levy was established for the nancial year 2011War.[2] Between 1915 and 1942, income taxes were ood
[6]
[2]
12.
levied at both the state and federal level.

2.3 Low Income Tax Oset

Personal Income Tax

The Low Income Tax Oset (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 oset is reduced by 1.5c for every dollar of
taxable income above $37,000, meaning incomes greater
than $66,647 do not receive any benet.[7] The LITO creates an eective 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.[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 Oset 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 le 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 dierently
ets. While it is not an oence to fail to provide a bank from adults.[8]
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. Eective 1
July 2011 the LITO applies only to salaried income but
not to investment income for minors. Some children and
some incomes are not aected by the children income
rates and receive the normal rate. Such as full-time/parttime employment income.

2.5

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.[9]

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 beneciary, 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 signicantly integrated or related.
Current Payroll Tax Rates and Thresholds[10]

Queensland and the Northern Territory payroll tax rates

are eective rates on payrolls above $5.5 million and
$5.75 million respectively. All other jurisdictions levy
The company tax rate is a at 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 prots distributed as dividends by
Australian-resident corporations. Double taxation relief 6 Family Tax Benet
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 Benets (FTB) that are applied in a more comrate of 30 cents per dollar of dividend. Shareholders may
plex way by dierent departments. The benets and
then use these credits to oset 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 osetting all payable income tax.
income.

Company Tax

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 taxpayers 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 beneciaries. 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 ination, 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 sacrice superannuation contributions are also counted as income.
There are other benets related to this, for example the

8.2

Residence

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 Oce, gal activities such as burglary, smuggling and illegal drug
dealing and income from these activities is taxable.
Centrelink, and the Family Assistance Oce.
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 taxpayers normal income earning
activities however may be considered a business in itself.
These can include generating a prot from a prot making scheme,[22] and prot earned from activities that go
beyond the mere realisation of an asset in an enterpris7 Eective Marginal Tax Rates
ing manner. Income from investment or property is also
classied as ordinary income and can include: rent from
Because reductions of means tested benets are additive, a lease, interest on a loan, dividends and royalties
they can lead to a very high eective marginal tax rate of When assessing the amount of ordinary income, only the
tax. For example, a person with children earning $95,000 prots 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
benet, an eective marginal tax rate of 69%. [17]
Contrary to the FTBs name, as from 1 July 2009 it
will not be possible to claim FTB payments through
the taxation system.[16] All payments will be handled by
Centrelink.

If other means tested allowances are payable (e.g. child 8.2 Residence
care benets, superannuation co-contribution, payments
for a disability etc.) then the eective rate can be over
Residents of Australia for income tax purposes are sub100%.[18]
ject to income tax on income from all sources,[23] whereas
The means testing reects 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.[19] Further, sources.
Australias means-tested tax and spending programs are
There are four tests to determine whether an individual is
extraordinarily complex.[20]
a resident for income tax purposes. An individual can be
classied 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 nally 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 benet in money or moneys
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,
prot making activity income is where the contract is perfrom a prot 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 classied as ordinary individend income where the paying company is located.
come.
Normal or ordinary proceeds from a business activity are
classied as ordinary income. A business includes any
profession, trade, employment, vocation or calling, but
does not include occupation as an employee.[21] Activities of a commercial nature that are carried on regularly
and in an organised, systematic way, on a large scale or
with view to prot will generally be considered to be a

9 See also
Constitutional basis of taxation in Australia

10

11

References

[1] Income Tax Act of 1902 (2 Edw VII, No 10)". Queensland Historical Acts. Australasian Legal Information Institute. Retrieved 22 March 2014.
[2] A brief history of Australias tax system Department of
the Treasury
[3] What is the Medicare levy?". Medicare levy essentials.
ATO. 30 June 2008. Retrieved 2009-03-09.
[4] Individual income tax rates. Rates and calculators.
ATO. 1 July 2014. Retrieved 2015-02-18.
[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: Lowincome tax oset. Australia Taxation Oce. Retrieved
on 15 September 2012.
[8] Income of individuals under the age of 18. Australian
Taxation Oce. Retrieved on 15 September 2012.
[9] Australian Taxation Oce 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
Oce of State Revenue. Retrieved 2009-07-23.
[12] Payroll Tax in Queensland. Payroll Tax. QLD Government Oce of State Revenue. Retrieved 2012-08-31.
[13] General Information fact sheet (PDF). Pay-roll Tax
Forms and Brochures. Government of Western Australia
Department of Treasury and Finance. Retrieved 201505-15.
[14] Rates and thresholds. Retrieved 2011-04-23.
[15]
[16] Australian Government, Family Assistance Oce, How
you can get paid
[17] Based on gures from earlier sections in this article.
[18] Andrew, Brian 2007. The contribution of eective
marginal tax rates to work disincentives.
[19] Dockery, et. al. 2006 Welfare reform, housing assistance
and eective marginal tax rates
[20] AMP. Trends in eective marginal tax rates 1996-97 to
2006-07
[21] Income Tax Assessment Act 1997 (Cth) s 995-1. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
[22] Income Tax Assessment Act 1997 (Cth) s 15-15. Commonwealth Consolidated Acts. Retrieved on 15 September 2012.
[23] Income Tax Assessment Act 1997 (Cth) s 6-5(2). Commonwealth Consolidated Acts. Retrieved on 15 September 2012.

EXTERNAL LINKS

11 External links
Australian Income Tax Calculator (mobile compatible)
Australian Personal Income Tax Calculator

12
12.1

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