Income tax in Australia

Income tax in Australia is levied upon three sources of income for individual taxpayers: personal earnings (such as salary and wages), business income and capital gains. Collectively these three sources of income tax account for 66% of federal government revenue and 57% of total revenue across the three tiers of government. Income received by individuals is taxed at progressive rates, while income derived by companies is taxed at a flat rate of 30%. Generally, capital gains are only subject to tax at the time the gain is realised. Income tax is collected by the Australian Taxation Office for the Government of Australia.

In Australia the financial year runs from July 1st to June 30th of the following year.

Income tax is applied to the taxable income of a taxable entity. Taxable income is calculated, in a broad sense, by applying allowable deductions against the income of a taxable entity.

History

In 1880, Tasmania was the first state to introduce an income tax. It took the form of a withholding tax on distributed income of companies. The tax was seen as necessary due to a fiscal crisis. For much the same reason, South Australia followed suit in 1884. By 1907, all states had introduced an income tax.

Personal Income Tax

Income tax on personal income is a progressive tax. The current tax-free threshold is $6,000, and the highest marginal rate for individuals is 45%. In addition, most Australians are liable to pay the Medicare levy, of which the standard is 1.5% of taxable income.

As with many other countries, income tax is withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit Tax File Number (TFN) must be quoted to employers for employees to have withholdings calculated using the various tax brackets. In the absence of this number, employers are required to withhold tax at the rate of 46.5% (the highest marginal rate plus Medicare levy) from the first dollar. Likewise, banks must also withhold the highest marginal rate of income tax on interest earned on bank accounts if the individual does not provide their TFN to the bank. Corporate and business taxpayers are required to provide their TFN or Australian Business Number (ABN) to the bank, otherwise the bank will be required to withhold income tax at the highest rate of tax. It is not an offence to fail to provide a bank or financial institution with a TFN or ABN.

Individual income tax rates

Tax rates 2009-10

Taxable income	Tax on this income	Effective Tax Rate
$0 – $6,000	Nil	0%
$6,001 – $35,000	15c for each $1 over $6,000	0% – 12.4%
$35,001 – $80,000	$4,350 plus 30c for each $1 over $35,000	12.4% – 22.3%
$80,001 – $180,000	$17,850 plus 38c for each $1 over $80,000	22.3% – 31.0%
$180,001 and over	$55,850 plus 45c for each $1 over $180,000	31.0% – 45%

Tax rates 2008-09

Taxable income	Tax on this income	Effective Tax Rate
$0 – $6,000	Nil	0%
$6,001 – $34,000	15c for each $1 over $6,000	0% – 12.4%
$34,001 – $80,000	$4,200 plus 30c for each $1 over $34,000	12.4% – 22.5%
$80,001 – $180,000	$18,000 plus 40c for each $1 over $80,000	22.5% – 32.2%
$180,001 and over	$58,000 plus 45c for each $1 over $180,000	32.2% – 45%

Tax rates 2007-08

Taxable income	Tax on this income	Effective Tax Rate
$1 – $6,000	Nil	0%
$6,001 – $30,000	15c for each $1 over $6,000	0% – 12.0%
$30,001 – $75,000	$3,600 plus 30c for each $1 over $30,000	12.0% – 22.8%
$75,001 – $150,000	$17,100 plus 40c for each $1 over $75,000	22.8% – 31.4%
$150,001 and over	$47,100 plus 45c for each $1 over $150,000	31.4% – 45%

For further history, see the ATO's tables of individual income tax rates for prior years.

Low Income Tax Offset

The Low Income Tax Offset (LITO) is a tax rebate for individuals on lower incomes. From 1 July 2008 it provides individuals earning less than $30,000 with a tax rebate of $1,200. The full offset is reduced by 4c for every dollar of taxable income above $30,000, meaning incomes greater than $60,000 do not receive any benefit. The LITO creates an effective tax-free threshold of $14,000 for low income earners.

Income tax for Minors

Individuals under 18 years of age are taxed differently than adults.

Company Tax

The company tax rate is a flat 30%, though through the dividend imputation system Australian residents effectively do not pay this company income tax upon the profits distributed as dividends by Australian-resident corporations. When an Australian corporation pays corporate income tax, franking credits are generated and can then be applied to dividend payments at a maximum rate of 30 cents per dollar of dividend. Shareholders may then use these credits to offset their own personal income tax payable, including claiming a refund for excess credits left over after offsetting all payable income tax.

Capital Gains Tax

Capital gains tax in Australia is part of the income tax system rather than a separate tax. Net capital gains (after concessions are applied) are included in a taxpayer's taxable income and taxed at marginal rates. Capital Gains applies to Individuals, Companies and any other entity which can legally own an asset. Trusts usually pass on their CGT (Capital Gains Tax) liability to their beneficiaries. Partners are taxed separately on the CGT made by partnerships.

In 1999 indexation on capital gains ceased and subsequently gains on assets held for more than one year are usually reduced by a discount of 50% for individuals, and 33% for superannuation funds. However, in some cases where an indexed cost base applies (where an asset was acquired before indexation ceased) applying the old indexation rules gives a better tax result. Capital gains realised by companies are not discounted. Capital gains made by trust structures are usually taxed as if they were made in the hands of the ultimate beneficiary, though there are exceptions.

The disposal of assets which have been held since before 20 September 1985 (pre-CGT assets) is exempt from CGT.

Payroll Tax

State governments in Australia levy a payroll tax on the wages outlay of employers. Typically the tax applies to all wages above a threshold. Groups of companies may be taxed as a single entity where their operations are significantly integrated or related.

State	Theshold	Tax Rate
New South Wales	?	?%
Queensland	$1000000	4.75%
Victoria	?	?
Australian Capital Territory	$?	?%
Northern Territory	$?	?%
Tasmania	$?	?%
South Australia	$552,000	?%
Western Australia	?	?%

There are deductions, concessions and exemptions available to those companies that are eligible.

Family Tax Benefit

For families with dependent children the income tax system includes a supplementary set of rules known as Family Tax Benefits (FTB) that are applied in a more complex way. The benefits and thresholds vary depending on the number of children, and which of the married partners earns the additional income.

There are two key components relating to total family income (FTB-A) and relating to the income of the lower income earner (FTB-B). In essence low income families receive a government benefit of around $6000 per annum per child and this benefit is phased out at varying rates depending on whether extra income is earned by the higher or the lower income earner. The combined phase out rate varies between 20% and 50% (combining part A and part B). The total effective marginal tax rates for families (once these benefit phase outs are combined with the normal rates of tax on income) are often as high as 75%. In essence for some families out of each additional dollar they earn they are only allowed to retain 25 cents. The impact of Family Tax Benefit thresholds generally affects all families with a combined income under $100,000 but also affects many families with higher incomes.

The work disincentive effect of the high effective marginal tax rates produced by the Family Tax Benefit rules have been widely criticised in the media as well as by opposition parties and even on occasion by members of the government.

Contrary to the FTB's name, as from 1 July 2009 it will not be possible to claim FTB payments through the taxation system. All payments will be handled by Centrelink.

See also

• Income tax
• Constitutional basis of taxation in Australia