What is Taxation?
In Australia, we have a marginal tax rate system for individuals. It is administered and enforced by the Australian Taxation Office. Whilst income tax law is quite straight forward, the Australian tax system is anything but simple! Different tax structures, concessions, rebates and offsets make advice necessary to navigate the best outcomes for you.
Income tax is payable on ‘Taxable Income’ at your marginal tax rate.
Taxable income is calculated as: assessable income less allowable deductions
Assessable income includes salary and wages, business income, interest from your bank account and investment income. Some Centrelink and Veteran Affairs payments are also treated as assessable income. If you are an employee, your income tax will be deducted from your salary. As a self-employed person, you will need to make instalments for your income tax estimate throughout the year. In any event, you need to complete an income tax return each year to determine if you have over or under-paid your tax and are due to pay, or be refunded by, the ATO.
Medicare is charged as 1.5% of your taxable income. If your income is over the Medicare threshold and you do not have qualifying private health care cover, a Medicare levy surcharge of 1-1.5% will also be payable generally.
Deductions & Offsets
The amount of tax you pay can be reduced, most commonly, by two methods:
- A tax deduction that reduces your taxable income.
- A tax offset that reduces your tax payable.
Generally, deductions are expenses that have been incurred in the earning of related income. Tax offsets are provided by the government to negate the impact of tax bills in certain scenarios. For example, the low-income offset sets out to reduce the impact of tax on low-income earners.
How does it work?
Earnings from bank accounts and fixed interest deposits such as term deposits, will be treated as assessable income and need to be added to your tax return each year.
Investment income is taxable and so too are capital gains on investment assets. Special tax rules apply to capital gains. Our tax system aims to avoid double taxation. That means if the money has already been taxed elsewhere, it does not get taxed again. This impacts various investment income sources such as Australian companies, foreign companies and property trusts. Advice will help you navigate the different tax treatment for your investments.
Superannuation is a trust and if complying with superannuation law, it receives concessional tax status. The tax rate for super is generally 15% (bar a few exceptions). Any earnings on your super must stay within the fund until you meet a condition of release such as retirement.
Other company and trust structures can also provide tax efficiency depending on their use. The company tax rate is different to personal income tax rates. For small companies that meet the criteria, the rate is 27.5%, other companies, the tax rate is 30%. Discretionary trusts can retain earnings and choose which beneficiaries get distributions when paid.
What should I be thinking about?
- There are tax management strategies you can utilise but remember that tax avoidance is illegal in Australia and is enforced by the ATO.
- You need to complete your tax return each year. You must keep records for at least 7 years.
- Income tax rates are different for non-residents and minors. Further advice should be sought in these circumstances.
- There are many deductions that can apply to your assessable income. Advice should be sought from a qualified accountant to make sure you make the most of these to reduce your tax payment each year.