Tapuriah Jain & Associates

Income tax in Australia

Income tax in Australia is imposed by the federal government on the taxable income of individuals and corporations. State governments have not imposed income taxes since World War II. On individuals, income tax is levied at progressive rates, and at one of two rates for corporations. The income of partnerships and trusts is not taxed directly, but is taxed on its distribution to the partners or beneficiaries. Income tax is the most important source of revenue for government within the Australian taxation system. Income tax is collected on behalf of the federal government by the Australian Taxation Office.

Taxable income is the difference between assessable income and allowable deductions. There are three main types of assessable income for individual taxpayers: personal earnings (such as salary and wages), business income and capital gains. Taxable income of individuals is taxed at progressive rates from 0 to 45%, plus a Medicare levy of 2%, while income derived by companies is taxed at 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% if the capital asset sold was held for more than 1 year.

In Australia the financial year runs from 1 July to 30 June of the following year.

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 . 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.

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

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:

·        The Medicare levy of 2% (legislation pending to increase this to 2.5%).

·        The low income levy, which effectively increases the tax free threshold to $20,543.

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.

Medicare levy:

When Medicare was introduced by the Hawke Labor Government in February 1984, it was accompanied by a Medicare levy to help fund it. The levy was set at 1% of personal taxable income and applied to all but the lowest income-earning tax-payers. The levy was later increased to 1.25% in December 1986 to further cover rising medical costs. Low income earner threshold exemptions were also increased.

The Medicare levy was raised again by the Keating Labor Government in July 1993, up to 1.4% of income, again to fund additional healthcare spending outlays. The low income earner exemption thresholds were also raised. In July 1995, two years later the Keating Labor Government raised the levy to 1.5%, to offset a decline in Medicare levy receipts. The low income exemption thresholds were increased, again.

The standard Medicare levy was left at 1.5% in the following years since July 1993 until the Gillard Labor Government announced in May 2013 that it would be increased to 2% on 1 July 2014 to fund the National Disability Insurance Scheme. The Labor Government was not re-elected in September 2013, but the Medicare levy increase went ahead as scheduled in July 2014.[12] In May 2017, the Turnbull Liberal Government announced that from 1 July 2019, the Medicare levy will increase from 2% to 2.5% to fully fund the National Disability Insurance Scheme.

Medicare Levy Rate	Period
1.00%	February 1984 – November 1986
1.25%	December 1986 – June 1993
1.40%	July 1993 – June 1995
1.50%	July 1995 – June 2014
2.00%	July 2014 – June 2019
2.50%	July 2019 – onwards

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.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.

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 2017-18

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.

Collection:

Income tax on wages 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.

Company Tax:

Before 1987, an Australian company would pay company tax on its profits at a flat rate of 49%; and if it then paid a dividend, that dividend was taxed again as income for the shareholder.[19] To stop this double taxation effect and create a "level playing field", dividend imputation was introduced in Australia in 1987. The company tax rate was reduced to 39% in 1988 and 33% in 1993, and increased again in 1995 to 36%, to be reduced to 34% in 2000 and 30% in 2001.

With dividend imputation, Australian-resident shareholders who receive a dividend from an Australian company that had paid Australian company tax is entitled to claim a tax credit (called a franking credit) on the company tax imputed or associated with the dividend, as declared by the company. The franking credits associated with such dividends is a tax credit against the shareholder's tax liability. Initially, in 1987, any excess of such credits over the tax liability was lost. In 2000, such excess credits became refundable. Such dividends are called "franked dividends", and "unfranked dividends" are dividends which do not have any associated "imputation credits". Non-resident shareholders are not entitled to a tax credit or refund of imputation credits and are subject to a withholding tax on the unfranked dividends they receive.

From 2015–2016, designated "small business entities" with an aggregated annual turnover threshold of less than $2 million were eligible for a lower tax rate of 28.5%. 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%. Additionally, the Australian Government announced that from 2017–18, corporate entities eligible for the lower tax rate will be known as "base rate entities". The small business definition will remain at $10 million from 2017–18 onwards, however the base rate entity threshold (the aggregated annual turnover threshold under which entities will be eligible to pay a lower tax rate) will continue to rise.

Company Tax Rate	Period	Notes
45%	1973 – 1979
46%	1979 – 1986
49%	1986 – 1988	The classical system of company taxation was replaced by dividend imputation in 1987.
39%	1988 – 1993
33%	1993 – 1995
36%	1995 – 2000	Accelerated depreciation was removed in 1999.
34%	2000 – 2001	Refundable imputation credits were introduced in 2000.
30%	2001 – Present

Capital gains tax:

Capital gains tax (CGT) in Australia is part of the income tax system rather than a separate tax. 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 gain 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. 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 ⅓% for complying superannuation funds.

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.

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%.

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%.

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

Legal framework:

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.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,[32] 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,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:

·        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

·        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 Australia 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.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.