Taxation is nothing new in society and it has been used by Governments and ruling parties for centuries to help fund essential public assets and services. Today, the Governments of countries around the world use different types of taxation, as well as different rates of taxation, to raise important funds to strengthen an economy and provide essential services.
Here in Australia, taxation rules are very complex and continually changing. As such, this article provides a simple summary of taxation in Australia without going into too much detail.
Personal income and corporate tax is generally calculated over the financial year (sometimes referred to as fiscal year), with the Australian financial year running from 1 July to 30 June.
There are many forms of taxation in Australia. Most taxes are imposed by the Federal Government which utilises the Australian Taxation Office (ATO) as the collection agency.
Of these Federal Government taxes, individual income tax is the most common. This is illustrated in the following tax liabilities by source diagram from the ATO’s ‘Taxation Statistic 2014 – 2015’.
If we look at income tax further, the rate of tax which is payable will ultimately depend on the taxpayer’s taxable income, with marginal rates of tax applicable as income levels rise as per the table below. Tax planning in Australia becomes a very important initiative for those with higher incomes as a way to try to reduce tax payable. This can involve diverting income to a lower tax structure by splitting of income (if possible) via partnerships, companies and superannuation funds. Examples of applicable tax rates in the 2016 / 2017 financial year are as follows.
||$0 - $18,200
|$18,201 - $37,000
||19% over $18,200
|$37,001 - $87,000
||$3,572 + 32.5% over $37,000
|$87,001 - $180,000
||$19,822 + 37% over $87,000
||$54,232 + 45% over $180,000
||30% on taxable income (for small companies 27.5%)
|Complying Superannuation Fund
||Trust income is included in the assessable income of those beneficiaries that are “presently entitled” to it.
||Partnership income is apportioned and included in the assessable income of the partners.
|Tax Exempt Bodies (e.g. Charities)
||0% tax on income
*At highest Marginal Tax Rate and Includes 2% Medicare Levy
Federal, state and local Governments may also impose a levy on taxpayers, which is a charge payable for a stated public purpose. Examples of such levies include the Medicare Levy, Flood Levy, Temporary Budget Repair Levy and the Emergency Services Levy.
When it comes to calculating the tax payable, a basic approach applies to most taxpayers. A taxpayer pays tax on taxable income, which is determined by deducting allowable deductions (e.g. an individual’s business travel expenses) from assessable income (e.g. an individual’s employment income). The tax payable by a taxpayer is then reduced by tax offsets (e.g. franking credits) and then finally (where applicable) the Medicare Levy is added.
Further to the table above it’s important to note that higher individual tax rates are applicable for those who are non-residents and minors.
A taxpayer has the opportunity to reduce their tax payable through the use of offsets (sometimes referred to as rebates). Generally speaking, an offset can reduce a taxpayer’s tax payable to zero, but on their own they can’t provide a taxpayer a refund. One of the exceptions to this is franking credits, where excess credits to tax payable are refunded to the individual or taxable entity.
Any taxation system which is in place relies on the taxpayer to provide correct information to ensure the appropriate tax is payable. Whilst a taxpayer may want to reduce their tax payable, it’s important to note that tax minimisation (within the relevant laws) is legal, however, tax avoidance is illegal. In Australia, the penalties which can apply to taxpayers who don’t meet their tax obligations (for whatever reason) can range from administrative penalties, such as fines, to civil and criminal penalties, including jail time. It is therefore important for taxpayers to receive appropriate advice on all tax related matters from a qualified tax specialist to ensure their ongoing obligations are met.