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It’s never fun to pay taxes, but it’s something everyone will have to do sooner or later. It’s important to know the rules so you pay the right amount and save money. Nothing is more frustrating than losing money to tax or receiving a big surprise bill at the end of the year. We’ll help you figure out the tax jungle – keep reading to get a full introduction to income tax in Australia.
Income tax in Australia is one of the main sources used to fund government activities for the public good. It can be divided into three main categories: Personal tax, business tax and capital gains. Personal income tax such as wages and salaries is a progressive tax which means that employees with a lower income also will pay a proportionally lower amount of tax. Company tax on the other hand is levied from all income made by companies and is currently at a rate ranging from 15 to 30%. Capital gains tax is a tax on all capital gains excluding home assets such as cars and furniture. So income tax is a broad term for three major areas of taxation. Let’s take a closer look at each one:
This tax applies to individuals who earn an income that doesn’t come from a business, but from wages or salaries. It’s a progressive tax which means that each tax payer pays according to his or her salary. Personal tax can be divided into following sub categories:
The individual tax for residents and foreigners are both progressive rates, albeit a little different from one another. The top marginal rate for residents is 45% while tax payers earning $18,200 or less don’t pay any taxes at all.
Foreigners and Working Holiday Makers
Foreigners and Working Holiday Makers on the other hand pay a minimum 35.5% on every dollar earned. The same rates apply to minors, but minors might pay a higher rate if they are not an ‘excepted person’. This means that they will have to prove that their income is actually coming from a legitimate source such as a full time job. This rule is in place to prevent parents from diverting money to their children.
In all three cases it’s a progressive rate that depends on taxable income. You can see the current rates here.
Low Income Offset
As a general rule, your tax rates depend on your income. However, if you have a particularly low income, you might be eligible for an offset. You can’t calculate this yourself. Instead, it is calculated for you when you lodge your tax return. At the time of writing this, you may be eligible for a low income tax offset if you earn less than $66,667. The maximum tax offset of $445 applies if your taxable income is less than $37,000.
Medicare Levy and Budget Repair Levy
We’ve discussed basic rules when it comes to individual tax. However it does become a little more complicated than that. Closing related to income tax are levies. Some people will still have to pay a certain percentage of their income to various levies. At the moment, there are two levies in place that aren’t included in the normal tax rates and that you will have to include on top of whatever percentage you already pay: The temporary budget repair levy and the Medicare levy.
The temporary budget repair levy is an extra marginal tax withheld from individual tax payers with a taxable income of more than $180,000. The tax makes up an extra 2% of every dollar earned over the $180.000 and was introduced as a part of the 2014-15 Federal budget. It applies to residents and non-residents alike with some special rules applying to minors as well. The levy will cease to apply from 1 July 2017.
The Medicare levy is another extra tax. Medicare is Australia’s public health care service which is partly funded by taxes. Not everyone is liable to pay the Medicare Levy of 2%. You might for example pay a reduced rate or nothing at all if your taxable income is less than a certain amount. There is also something called the Medicare levy surcharge (MLS). If you don’t have private hospital health insurance, and your taxable income is more than a certain amount, you may be liable to pay MLS. If you do have private hospital health insurance, you might be eligible for a government funded discount called the private health insurance rebate. The rebate is a government help to cover the cost of your insurance.
You can use online tools such as an income tax calculator in Australia to check what taxes you need to pay. We will talk more about that later.
The name Capital Gains Tax makes it sound like it’s a separate form of tax, but it isn’t. CGT is derived from the difference between what an asset cost you and what you receive when you sell it. In the same way, you can use a capital loss to reduce CGT in the same income year. If your capital loss is greater than your gain, you can generally deduct it from future capital gains. Most personal assets are exempt from CGT, including your home, car, and most personal items such as furniture. But for example if you have an investment property and sell it, making a profit, CGT will apply.
Company tax is in many ways a simpler issue. Small businesses have to pay a rate of 28.5% while other businesses pay a rate of 30%. Other organisations such as life insurance companies and pooled development funds pay different rates. It is worth noting that non-profit companies have special rules for lodging their tax returns and also get special tax rates. Tax exempt non-profit organisations for example don’t need to lodge a tax return at all if they have a taxable income of less than $416 per year.
Now that you know a little bit more about the different rules in Australia, let’s talk about how your taxes are calculated and paid. It’s important to know what to do in order to pay your taxes right.
Here are the basics: The financial year in Australia runs from 1 July to 30 June the next year. Tax is calculated by assessing income and eligibility for deductions. Individual taxes (salaries and wages) is withheld by the employer often using Pay As You Go (PAYG). It’s important for you to provide your employer with your tax file number (TFN). If you don’t, they won’t know how much tax to withhold and have to withhold the maximum rate from your salary. It works similarly for businesses, except they provide their TFN or Australian Business Number (ABN) to their bank, which is then responsible for withholding the tax. If an ABN or TFN is not provided, the bank is also obligated to hold back the maximum tax rate.
The tax withheld from you should be quite close to the actual tax you have to pay. However, discrepancies and deductions are declared in the annual tax return which can result in a refund or reduction of taxation debt.
If you are still a bit confused about how much tax you should pay, you can use an online tax calculator. An income tax calculator in Australia makes it possible for you to calculate exactly what will have to pay in taxes and levies with your current salary. It might also calculate different levies and superannuation for you.
An income tax calculator in Australia will need some information from you to calculate your tax, such as residency status and annual income. Most online calculators take only a few seconds to give you the result. You can also try to change some of the data to see what would happen if you for example earned a bit more or a bit less, or if you paid more to for example superannuation.
Calculators can be a helpful tool and a source and a first point of call for free tax advice as you won’t have to spend hours trying to churn numbers yourself. It can erase some of the doubt and uncertainty that many people feel when trying to gape over the giant field of taxes.
There are also calculators that tell you if you for example need to lodge a tax file return. Depending on what you need to know, you can search the internet for the calculator that will help you the most.
It is also a good idea to talk to a professional tax advisor when it comes to your income tax to ensure that you are doing the right thing and getting the best for your personal circumstances.
Taxes are not always easy to figure out. They can cause a bit of a headache sometimes but it doesn’t have to be difficult. Knowing the basic tax rules in Australia is important, but there are also other things you can do. You can for example use an online tax calculator to help you figure out what rate you are liable to pay.
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