How Tax Works in Australia: Don’t Stress, Be Smart!

Income tax in Australia is imposed and regulated by the federal government on the taxable income of individuals and companies. For individuals, income tax is charged at a progressive rate while corporate profits are taxed at 30%.

Australians pay taxes that fund health, education, defence, roads and rail services as well as for welfare, disaster relief and pension payments.

For further information, we have summarized important points that will help you find out how does tax work in Australia.

Who Needs to Pay Tax?

Australia imposes taxes on both resident individuals and non-resident individuals. Both are subject to mandatory tax payments with the provision that individuals domiciled in Australia are subject to worldwide income tax, while non-residents are required to pay Australian income tax.

The mandatory tax for Australian residents is income sourced from Australia and overseas, except for certain overseas income and profits for temporary residents.

Meanwhile, mandatory taxes for non-resident individuals include income tax only on income other than interest, royalties and dividends and are generally subject to withholding tax (WHT) originating from sources in Australia and income according to certain laws which is taxed based on profits.

How Much Tax Do You Pay in Australia?

Understanding your tax obligations in Australia is essential for effective financial planning. This guide will clarify how tax rates are determined based on your income and residency status, helping you navigate the essentials of the Australian tax system.

Income Tax Rates

Based on the new regulations, the tax cut phase will take effect from 1 July 2024. Based on the new tax rate schedule, the Australian government determines that the marginal tax rate which was initially 19% will be reduced to 16%.

This regulation applies to taxable income between AUD 18,200 and AUD 45,000, a marginal tax rate of 30% will apply to taxable income between AUD 45,000 and AUD 135,000 and a marginal tax rate of 37%. It will then apply up to AUD 190,000, and a top marginal tax of 45% will apply.

Taxable Income

For individuals, income tax is levied at a progressive rate and at one of two rates for companies. Income from partnerships and representations is not taxed directly but will be taxed on its distribution to partners or beneficiaries.

There are three main types of taxable income that apply to individuals including personal income such as salaries and wages, business income and capital gains.

Meanwhile, corporate income tax will be subject to a rate of 30%. As for capital gains tax or GTC in Australia, net capital gains will be taken and then included in statutory taxable income and marginal rate tax.

Medicare Levy

The Medicare levy is part of the how does tax work in Australia system that you pay as additional tax on your taxable income. All Australians pay an income tax surcharge.

If you earn more than $27,068 per year or $42,805 for senior citizens and retirees then you must pay a Medicare levy equal to 2% of your annual taxable income.

If your income is lower than $21,655 and $27,068 or $34,244 and $42,085 for senior citizens and retirees then you will only pay a portion of the Medicare contribution.

Tax Returns

To file a tax return you need to know how much income you earn from work including cash payments from interest on bank accounts or investments, how much tax has been withheld from your income and about any deductions and tax offsets you claim.

When you file your tax return it will all go through a calculation of whether you should have paid the correct amount of tax and you will receive an assessment notification to you. You also have to keep records for at least five years from the date you submit your tax return.

You can file online using myTax or through a registered tax agent and complete your tax return documents. Tax returns cover the income year from July 1 to June 30, and your tax return must be filed or must be carried out by a tax agent before October 31.

PAYG (Pay As You Go)

An employer can deduct an employee’s wages for taxes if:

• An employee agrees to it in writing and is primarily for their benefit
• It is authorized by law, court order or by the fair work commission
• it is allowed based on employee appreciation
• This is permitted based on the registered employee agreement and the employee has agreed to it.

The amount of deduction depends on legality and preferences as well as the type of deduction. Payroll tax rates, thresholds and deduction entitlements vary between States and territories.

Types of salary deductions include mandatory deductions, voluntary salary deductions, pre-tax deductions and post-tax deductions. Deductions are not permitted if:

• It benefits the employer directly or indirectly and is unreasonable in the circumstances.
• The employees concerned are under 18 years of age and their parents or guardians have not agreed in it.

Example/Scenarios

As good citizens, we should obey the applicable regulations, including the tax system. Just like the general tax system, how does tax work in Australia imposes taxes whose benefits will return to its citizens.