The Australian taxation system is complex and impacts nearly every aspect of life Down Under. From the money you earn to the goods and services you buy, taxes shape the Australian economy and funds essential government services. Understanding how the Australian tax system works is an important part of being an informed citizen.
A Progressive Taxation System
Income tax is the largest source of tax revenue for the Australian government. Individuals and businesses pay income tax on their earnings to the Australian Taxation Office (ATO).
For individuals, income tax is applied on a progressive scale with higher tax rates for higher income levels. There is a tax-free threshold up to a certain amount of income, currently $18,200. After that, tax rates range from 19% to 45% and are applied in brackets to different portions of taxable income. This means that lower income earners pay a smaller percentage of their income in tax, while higher income earners pay a larger percentage.
2022-23 Income Tax Rates for Australian Residents for Taxation Purposes
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $45,000||19c for each $1 over $18,200|
|$45,001 – $120,000||$5,092 plus 32.5c for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37c for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45c for each $1 over $180,000|
Tax-Free Threshold in the Australian Tax System
The tax free threshold is the amount of income an individual can earn each financial year before paying any income tax. In Australia, the tax free threshold aims to ensure that those on low incomes do not pay income tax.
For the 2022-23 financial year, the tax free threshold in Australia is $18,200. This means any individual who earns less than $18,200 of taxable income in that financial year will not pay any income tax. Their entire income is effectively tax free up to that threshold amount.
However, once an individual’s taxable income exceeds the $18,200 threshold, they begin paying tax. Tax is then applied at the relevant tax rate based on their total taxable income for the year.
The tax free threshold is indexed each year to increase in line with inflation and average weekly earnings. This helps ensure it remains an effective exemption for low income earners.
Goods and Services Tax in the Australian Tax System
The Goods and Services Tax (GST) is a broad-based tax of 10% on most goods and services sold in Australia. It is designed to be a consumption tax, taxing the supply of goods and services rather than income. The GST applies to both businesses and individuals in Australia.
For individuals, the GST is included in the price of most goods and services they purchase. Most retail purchases, dining out, utility bills and services like haircuts are subject to 10% GST. However, some items are GST-free, including most fresh food, health services and education.
The GST aims to raise government revenue in an efficient and broad-based manner. However, it also makes everyday purchases more expensive for individuals. To partially offset this, lower income Australians may be eligible for government payments and benefits.
Capital Gains Tax in the Australian Tax System
Capital gains tax is a tax on the profit made when selling an asset that has increased in value. In Australia, capital gains are taxed at an individual’s marginal tax rate, with some concessions.
For individuals, capital gains tax applies to the sale of assets like shares, investment properties, collectibles and personal use assets (if sold for a profit). When an asset is sold, the capital gain is calculated as the sale proceeds minus the original cost base. This capital gain is then included as part of the individual’s assessable income and taxed at their marginal tax rate.
However, there are some concessions that reduce the capital gain subject to tax. Individuals can claim a 50% discount on their capital gain, effectively taxing only half of the total capital gain at their marginal tax rate. They can also carry forward capital losses to offset against future capital gains.
The capital gains tax aims to ensure that all forms of income are taxed fairly. However, it can impact individuals by reducing the after-tax profit made on the sale of assets. Individuals may need to set aside a portion of their capital gain to cover their capital gains tax liability.
Fringe Benefits Tax in the Australian Tax System
Fringe benefits tax (FBT) is a tax paid by employers on certain non-cash benefits provided to employees. The aim of FBT is to ensure that cash and non-cash forms of remuneration are taxed in a similar way.
Employers must pay FBT at a rate of 47% on the grossed-up taxable value of fringe benefits provided. Common fringe benefits include company cars, low-interest loans, subsidised meals and entertainment. However, some benefits are FBT-exempt, like laptops used mainly for work.
FBT does not directly impact employees as it is paid by employers. However, employers may choose to reduce employees’ cash salaries to partly offset the cost of FBT. This means the total remuneration package for employees – including fringe benefits – remains similar.
The FBT aims to promote fairness and neutrality in the tax system by ensuring non-cash benefits are also subject to tax. However, the compliance costs of administering FBT can be significant for employers.
How Tax Deductions Work in the Australian Tax System
Tax deductions allow individuals to reduce their taxable income by claiming certain expenses incurred in the course of earning an income. This in turn reduces the amount of income tax they have to pay.
In Australia, individuals can claim tax deductions for various work-related and some personal expenses. Common work-related deductions include uniform expenses, work-related travel costs and self-education expenses. Some personal deductions include investment losses, medical expenses above a certain threshold and donations to charities.
To claim a tax deduction, individuals must keep records of their expenses and receipts. They then submit a tax return to the Australian Taxation Office (ATO) detailing all their income, deductions and tax withheld. The ATO will determine their final tax payable or refund after considering all deductions claimed.
Tax deductions benefit individuals by lowering their taxable income and tax payable. However, only legitimate expenses directly related to producing assessable income can be claimed as deductions.
Example of How Tax Deductions Work in the Australian Tax System
John earns a salary of $80,000 per year before tax. Without any deductions, John’s taxable income is $80,000 and his tax payable would be $18,067 for the 2022/23 income year.
However, John has work-related deductions of $5,000 for work-related expenses.
With the $5,000 deduction, John’s taxable income reduces to $75,000. His tax payable then becomes $16,342.
By claiming the $5,000 deduction, John has reduced his tax payable by $1,725 for the 2022/23 financial year.
Claiming work-related deductions lowers your taxable income and reduces the amount of income tax you have to pay. Every dollar you can claim as a deduction effectively saves you the amount of tax at your marginal tax rate. So the more deductions you can legitimately claim, the lower your tax bill will be.
We hope this broad information has helped give you a good basic understanding of how the Australian taxation system works. The Australian tax system can be complex, but with a solid foundation of knowledge about how the different taxes operate, you can be better prepared if you need to navigate it yourself.
ITP Accounting Professionals has helped maximize tax refunds for individuals for over 50 years. For an appointment phone 1800 367 487 or book online today.