The Australian tax system works by charging a higher tax rate if you earn a higher income. It is a marginal income tax system.

The Australian Tax Office or ATO is responsible for ensuring individuals, companies, trusts and other entities lodge their tax returns appropriately. The tax system uses a self-assessment program. Therefore, everyone is responsible for reporting their own tax to the ATO each tax year.

Year end: June 30

How your tax is calculated

An individual's taxable income is calculated by starting with their assessable income, which includes all the income they earn (think: salary, share dividends, rental income, etc.) and subtracting allowable tax deductions

Assessable income - deductions = taxable income

For example, Greg earns a salary of $80,000 and receives dividends of $5,000. His assessable income is $85,000. But Greg has $15,000 in allowable tax deductions. His taxable income is ($85,000 - $15,000) $70,000.

He pays tax based on the $70,000.

You will pay more tax if your taxable income is higher. 

More income = more tax.

Taxable IncomeTax payable
$0 - $18,200$0
$18,201 to $37,000$0.19 for every $1 over $18,200
$37,001 to $87,000$3,572 plus $0.325 for every $1 over $37,000
$87,001 to $180,000$19,822 plus $0.37 for every $1 over $87,000
$180,001 and higher$54,232 plus $0.45 for every $1 over $180,000
Taxable IncomeTax payable
$0 - $18,200$0
$18,201 to $37,000$0.19 for every $1 over $18,200
$37,001 to $87,000$3,572 plus $0.325 for every $1 over $37,000
$87,001 to $180,000$19,822 plus $0.37 for every $1 over $87,000
$180,001 and higher$54,232 plus $0.45 for every $1 over $180,000
Taxable IncomeTax payable
$0 - $18,200$0
$18,201 to $37,000$0.19 for every $1 over $18,200
$37,001 to $80,000$3,572 plus $0.325 for every $1 over $37,000
$80,001 to $180,000$17,547 plus $0.37 for every $1 over $80,000
$180,001 and higher$54,547 plus $0.45 for every $1 over $180,000

For example, Jenny is a part-time secretary and earns a salary of $30,000. She has $5,000 of eligible tax deductions. Her taxable income is $25,000 ($30,000 - $5,000). Her income tax is $1,292. That is, $0.19 x ($25,000 - $18,200) = 0.19 x 6,800 = $1,292.

Jenny might also pay Capital Gains Tax and/or the Medicare Levy (see below).

Non-Resident Taxpayers

Non-Residents are taxed at different (higher) rates than Australian residents for tax purposes.

Tip: You should consult a licensed tax agent to determine whether or not you fit into this category.

Common examples

You: "I am here on holiday, or visiting for less than 6 months".

Likely: non-resident.

You: "I'm a student from overseas. I am here for more than six months."

Likely: Australian resident for tax purposes.

You: "I'm leaving Australia temporarily, but I still call Australia home."

Likely: Australian resident for tax purposes.

Taxable IncomeTax payable
$0 - $87,000$0.325 for every $1
$87,001 to $180,000$28,275 plus $0.37 for every $1 over $87,000
$180,001 and over$62,685 plus $0.45 for every $1 over $180,000
Taxable IncomeTax payable
$0 - $87,000$0.325 for every $1
$87,001 to $180,000$28,275 plus $0.37 for every $1 over $87,000
$180,001 and over$62,685 plus $0.45 for every $1 over $180,000
Taxable IncomeTax payable
$0 - $80,000$0.325 for every $1
$87,001 to $180,000$26,000 plus $0.37 for every $1 over $87,000
$180,001 and over$63,000 plus $0.45 for every $1 over $180,000

Capital Gains Tax

Capital gains are the gains made on investments, with tax paid when the asset is sold for more than it cost.

For example, Jenny buys shares of BHP on the ASX for $30 and sells them two years later for $42. Jenny has a capital gain of $12 per share.

When an asset is sold for less than its cost, it is a capital loss.

Australian residents may be eligible for a capital gains discount of 50% if the asset is held for more than 12 months.

For example, because Jenny sold her BHP shares more than 12 months after she bought them (plus the days she bought and sold) she would pay tax on 50% of the gain ($6).

Capital losses cannot be offset against a person's salary or income but can be offset against other capital gains, or potentially carried forward to a future tax year.

For example, if Jenny made a capital gain of $6 per share on her BHP investment and a capital loss of $2 per share on her Telstra shares, she may be able to reduce her capital gain to $4 (that is, a $6 gain on BHP minus a $4 capital loss on Telstra).

TIP:

There are sooooo many laws governing capital gains assets and almost as many exemptions to this rule, plus all the other tax laws, so you should seek tax advice from a qualified professional. This page contains information only.

Other Taxes and Levies

In addition to the rates in the table above, Australian residents may also be liable to pay the Medicare Levy (2%).

There’s another tax called the Medicare Levy Surcharge. It applies to high-income earners. The surcharge may be avoided by holding the right amount of private health insurance for the entire financial year.

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Broadly, there are two types if super funds:

  • Complying superannuation funds, which are taxed at a reduced rate, currently 15%. Most funds fall into this category. 
  • Non-complying superannuation funds, which can be taxed at 47%. Ouch!

Superannuation funds can access the capital gains tax discount, but a super fund is eligible for a discount of only 33.3% or ⅓ of the gain.

For example, Jenny’s super fund is a complying superannuation fund which makes a $3,000 capital gain on BHP shares, which it held for two years. Her super fund would pay tax on $2,000 because 1/3 would be discounted. And because it is a complying super fund, her fund pays tax of only 15%, or $300 (15% x $2,000).

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Companies pay tax at a flat rate and are not eligible for capital gains tax discounts.

There can be different tax rates applied to small and large companies. Typically, most large companies pay tax at 30%.

 

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Trusts — and trust tax — can be complex, so you should seek expert advice if you have a beneficial interest, own a trust, or if you have a role to play in running a trust (trustee, executor, etc.).

Broadly speaking, if you receive income, dividends or something else from a trust, you may have to add the amount to your income tax.

 

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In the eyes of the ATO, children pay tax on two types of incomeone of them incurs a hefty tax bill.

In the next few months, we will cover the basics of the tax that children pay, in an upcoming video series, so stay tuned. Keep up to date by subscribing to our free newsletter – or just check back here soon!

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Test Your Knowledge

Jean-Claude earns $16,000 from his acting job, where he plays the role of a very fit yoga instructor. Will Jean be required to lodge a tax return?

Even though Jean-Claude is unlikely to pay income tax, he still needs to lodge an income tax return.

How Does Warren Buffett Identify Stocks To Buy?

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Download our free ASX and global investing guide, "How Warren Buffett Pick Stocks" when you join Rask Group's free Investor Club! Rask's Investor Club is designed to help you become a better investor by providing unique up-to-date insights on what's going on in the investing world.

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