A Guide to Taxation in Australia
The aim of this guide is to provide a broad introduction to the framework of Australia’s tax system. The Commonwealth is Australia’s federal (or national) level government which can impose taxation on all Australian taxpayers. The Australian tax system is a mix of direct and indirect taxes levied by both the Commonwealth and State governments, depending on the type of tax.
Jurisdiction to tax
The Federal Government of Australia has jurisdiction to tax Australian residents on income from worldwide sources and non-residents on only Australian sourced income.
Australian legislation contains specific rules relating to residency to determine whether an individual or company is a resident for tax purposes.
Australia also has a system for determining whether an income amount is sourced in Australia or another country. Generally, income is sourced in the place of employment or the fixed place of business.
International transactions are often sourced according to where the relevant contract is made, although there are often variations to these broad rules depending on the circumstances.
The risk associated with the residence and source rules is that one amount of income may be taxed in two different countries.
To avoid this, Australia has entered into many double tax agreements with other countries which will prevail over domestic law to ensure that taxation is only imposed once on any given amount of income.
In addition, Australia also operates a system of foreign tax credits under which tax credits are given to Australian residents who pay foreign tax on foreign income.
These credits are then used to offset against Australian tax paid on the same amount, again ensuring income is only taxed once.
Taxes on income
Taxable income is generally an entity’s total assessable income less any allowable deductions. If a loss is incurred it may be carried forward to future years provided the loss carry forward tests are satisfied.
Assessable income includes items such as salaries, wages, income from business, interest, rent and dividends.
Deductions generally include expenses that have been incurred in the course of gaining or producing income, in addition to a number of specific deductions allowable under legislation.
Deductions are not allowed for personal expenses or those of a capital nature. However, if certain conditions are met, it is possible for companies and individuals to set off losses against other types of income.
Taxes on capital gains (Capital Gains Tax (CGT)
CGT is imposed on gains realised from the sale of assets, with special rules applicable to the valuation of capital gains.
For taxation purposes, the assets subject to CGT are very broad and include both tangible and intangible assets.
Certain assets such as motor vehicles, personal use assets and one’s main residence are subject to exemptions, while foreign residents are subject to capital gains on only a limited range of assets, such as real property.
Capital gains are included in taxpayers’ assessable income and therefore taxed at each taxpayer’s applicable income tax rate (see below, Taxation of Individuals).
If the capital asset is held for longer than 12 months, Australian residents are entitled 50% discount for taxation purposes. The CGT rules have recently been amended so that non-residents can no longer access the 50% discount. Any capital loss incurred can be offset only against capital gains.
The aim of this guide is to provide a broad introduction to the framework of Australia’s tax system. The Australian tax system is a mix of direct and indirect taxes levied by both the Commonwealth and State governments, depending on the type of tax. The Commonwealth is Australia’s federal (or national) level government which can impose taxation on all Australian taxpayers.
There are also various tax incentives for capital investment and inbound investments to Australia that may apply in certain circumstances for a limited period of time.
Taxation of individuals and business entities on income and capital gains
Individuals are taxed on income and capital gains according to the rules mentioned above. As stated, both Australian resident individuals and non-resident individuals can be subject to income tax and CGT depending on the source of the income.
Australia uses a progressive tax scale system for the purposes of taxing individuals. Under this system, the rate of tax payable increases as taxable income increases.
For the 2013-14 income year (1 July 2013 to 30 June 2014), the following individual income tax rates apply in relation to Australian residents:
|Taxable income||Tax on this income|
|$0 - $18,200||Nil|
|$18,201 - $37,000||19 cents for each $1 over $18,200|
|$37,001 - $80,000||$3,572 plus 32.5 cents for each $1 over $37,000|
|$80,001 - $180,000||$17,547 plus 37 cents for each $1 over $80,000|
|$180,001 and over||$54,547 plus 45 cents for each $1 over $180,000|
Non-residents who come to Australia for work purposes and are treated as residents for tax purposes may also qualify to be a ‘temporary resident’.
Temporary residents are subject to the same tax rates as residents and receive other tax concessions.
Non-residents are taxed on their Australian sourced income in the 2013-14 income tax year in accordance with the following rates:
|Taxable income||Tax on this income|
|$0 - $80,000||32.5 cents for each $1|
|$80,001 - $180,000||$26,000 plus 37 cents for each $1 over $80,000|
|$180,001 and over||$63,000 plus 45 cents for each $1 over $180,000|
A company in Australia is a distinct and separate entity from its shareholders. Income received by a company is taxable to the company, after applying residency and source rules similar to those that apply to individuals.
Unlike individuals however, company profits are taxed at the flat rate of 30% regardless of the company’s level of income. However, the newly elected Liberal Party plans to cut the company tax rate by 1.5% from 1 July 2015, thereby reducing the company tax rate to 28.5%.
Dividends paid by companies to their shareholders are included in the shareholders’ assessable income and are subject to a ‘dividend imputation system’.
The purpose of this system is to pass on a ‘credit’ to shareholders for the tax that the company has paid on the profits from which dividends are paid.
This system therefore ensures that dividends are ultimately taxed at each shareholder’s applicable income tax rate. Access to credits however only applies to Australian resident shareholders.
A tax consolidation regime also applies for 100% owned group companies, allowing them to consolidate income for the entire group and ignore transactions within the group for the purposes of income tax.
Consumption taxes – the Goods and Services Tax (GST)
GST is a broad based consumption tax (similar to the Value Added Tax in other countries) imposed on the sale of most goods and services in Australia and those imported into Australia.
It is levied at a flat rate of 10%. Some supplies such as food, exports, education and health are excluded from GST. All consumers are required to pay GST when making a purchase.
Businesses or individuals carrying on an enterprise that have an annual turnover of more than a specified amount are required to register for GST purposes.
These businesses may either be liable to the ATO or entitled to a refund each year depending on the balance of the amount of GST collected through sales compared to any tax credits received from GST paid on goods and services purchased in the course of carrying on their enterprise.
Other taxes and levies
Fringe Benefits Tax (FBT)
FBT is imposed on the value of non-cash benefits provided by employers to employees.
Generally, benefits must be connected to the employee’s employment in order to be taxable, although certain fringe benefits are either specifically subject to FBT or expressly excluded under Australian law.
FBT is levied on the provider of the benefit at a flat rate of 46.5% and may be deductible against the employer’s taxable income.
Medicare Levy and Medicare Levy Surcharge
Medicare is Australia’s public health insurance scheme. It operates by receiving contributions through the Medicare Levy and the Medicare Levy Surcharge, which are taxes imposed on Australian residents’ taxable incomes.
The Medicare Levy is imposed at a flat rate of 1.5% of an individual’s taxable income, although exemptions may be given to low income earners and foreign residents.
The Medicare Levy Surcharge is an additional flat rate of between 1-1.5% imposed on high income earners who do not have private hospital insurance.
Superannuation tax – the Superannuation Guarantee Charge
In Australia, every employer must pay a minimum level of superannuation (known as the superannuation guarantee) to its employees to ensure that workers have money set aside for their retirement.
In the 2013-14 income tax year, the superannuation guarantee rate increased from 9% the previous year to 9.25% of each individual’s employment earnings. With amendments recently coming into effect, the minimum rate will increase progressively over the next six years until it reaches 12% from 1 July 2019 onwards.
If an employer fails to provide the minimum level of superannuation, they become liable to pay the Superannuation Guarantee Charge (SGC) which includes the amount of the shortfall in superannuation payments plus interest and administrative charges.
However, in practice, most companies will contribute the minimum level of superannuation to avoid the SGC.
Also, there are statutory limits to how much employers or employees can contribute to superannuation funds. If contributions are made in excess of these limits, a penalty charge may apply.
Luxury car tax
The luxury car tax is a flat rate of 33% imposed when a luxury car is sold or imported into Australia. Certain rules specify what amounts to a luxury car and under what circumstances it will attract the luxury car tax, although it generally applies to cars valued over approximately either $60,000 or $75,000, depending on the fuel consumption of the vehicle.
Other considerations when trading between Australia and other countries
Australia has transfer pricing rules that need to be considered where goods or services are bought or sold between Australia and other countries.
The transfer pricing rules have particular relevance to transactions between related parties in a corporate group for the supply of goods, services or finance that are not priced on terms which would be comparable to those that would be charged between parties transacting at arm’s length.
If an international transaction does not occur at arm’s length or is not supported by an acceptable pricing methodology, then market prices may be substituted into the transaction for Australian taxation purposes to ensure an appropriate level of tax is paid.
For an intra-group cross-border transaction to be deemed to have occurred at arm’s length, the Australian Taxation Office (ATO) requires that companies appropriately document the transaction itself and the pricing methodologies used when entering into the transaction.
Other factors that may be taken into account by the ATO include, amongst other things, the commercial justifications for the transaction, any applicable review processes and whether any alternatives were considered.
Customs duty is imposed on goods imported into Australia. The rate of customs duty is generally around 5% of the ‘customs value’ of goods, although this often changes depending on the type of good that is imported.
The customs value of a good is determined as a question of law, taking into account the type of good, its country of origin and the purpose of its import into Australia.
Customs duty is payable when the relevant goods enter Australia. The specific duty rules that apply will depend on how the goods are classified by the Australian Customs Service, and may be altered by Tariff Concession Orders or Free Trade Agreements.
The rules applying to customs duty in Australia are complex and importers should seek advice on a caseby-case basis.
If these products are imported into Australia rather than produced or manufactured in Australia, customs duty applies to their importation at a rate comparable to the excise rate (see above, Customs duty).
Excise duty is paid by either the manufacturer or distributer at a flat rate. The applicable excise rates may increase twice a year to reflect inflationary changes.
In addition, a licence is generally required to undertake activities in relation to excisable goods.
Administration of Australia’s taxation system
Australian taxation is based on a self-assessment model, where taxpayers are responsible for lodging their own taxation returns.
Individuals and companies are required to lodge an annual ‘Income Tax Return’, while companies and other entities may have further requirements for the purposes of GST and PAYG (see below, Withholding taxes).
Not every tax return in Australia is reviewed by the ATO. Instead, each taxpayer’s assessment of his/her income is taken to be true.
However the ATO does undertake audits of individuals’ and companies’ tax returns to ensure that a taxpayer’s actual tax affairs are consistent with his/her self assessment.
Withholding taxes are payable on a number of payment types at various flat rates depending on the payment in question.
The purpose of Australia’s withholding tax rules is to enable the efficient and timely collection of tax revenue on an ongoing basis.
The obligation to make a withholding rests with the ‘payer’ of funds, not the recipient. Under these rules, the payer must withhold an amount from certain payments it makes and then pay that amount to the ATO, usually in regular instalments throughout the year, depending on the size of the entity.
Withholding taxes are often paid where dividends, interest or royalties are paid by an Australian resident to a foreign entity. The rate of withholding is typically set out in the relevant double tax agreement.
In addition, withholding taxes also apply in relation to the failure to quote an Australian Business Number (ABN) or a Tax File Number (TFN) in various situations in which they are required (see below, Australian Business Numbers and Tax File Numbers).
Australia also has a ‘pay-as-you-go’ (PAYG) withholding tax regime. In the most common application of PAYG withholding, a business that has employees must withhold an amount from salary or wage payments made to its employees.
The amount withheld broadly represents the income tax payable on that salary or wage and must be remitted to the ATO.
Further, an amount must be withheld from payments made to another business if it has not quoted its ABN when dealing with your business (see below, Australian Business Numbers and Tax File Numbers).
PAYG withholdings generally occur at a rate of 46.5% in this situation.
Australian Business Numbers and Tax File Numbers
An ABN is an identification tool used by businesses in dealings with the ATO, other business and government agencies.
A business must have an ABN if it is required to register for GST (see above, Consumption taxes). All other businesses may choose whether to obtain an ABN.
However, if a business does not have an ABN, withholding taxes apply in its dealings with other businesses, effectively reducing the value of receipts from their other businesses (see above, Withholding taxes: PAYG).
As a similar identification tool, TFNs are used by individuals and organisations to help the ATO administer the Australian tax system.
They apply to certain types of income such as salary, wages and some forms of investment income. While it is not compulsory for an individual to have a TFN, it is highly recommended that individuals obtain a TFN because if it is not quoted where required, income tax will be withheld from income earned at the highest marginal tax rate (see above, Withholding taxes: PAYG).
State and Territory taxes
State jurisdiction to impose taxes and duties
States and Territories in Australia generally have jurisdiction to impose tax on various state-based transactions.
To fall within a state’s jurisdiction, transactions must generally be entered into or carried out within the boarders of a particular State, or alternatively they must have a connection to the particular State wishing to impose taxation on the relevant transaction.
States and Territories most commonly impose tax on immovable property situated in that particular State, as well as on various other state-based transactions such as car registration and employment.
Many State and Territory taxes and duties are not consistent throughout Australia and therefore the laws applicable in each jurisdiction must be considered where relevant. The taxes and duties mentioned below however indicate some common forms of state taxation.
Stamp duty is imposed on certain transactions such as transfers of property and dealings with shares in companies that are landholders. It is imposed on the acquirer in the relevant transaction, not the transferor.
The imposition of stamp duty is not consistent throughout the states, although it is generally imposed at either a fixed rate or at a rate that depends on the value of the transaction.
For example, New South Wales imposes stamp duty on transfers of land according to a sliding scale that is dependent on the value of the real property.
The cheapest valued properties attract stamp duty of 1.25%, with the rate progressively increasing to approximately 7% for the most expensively valued properties in New South Wales.
In a similar manner, Victoria charges duty on transfers of land on the greater of the market value of, or the consideration paid for, the property.
For transfers occurring since 2008, stamp duty is then paid at a rate of 5.5% for high valued properties down to 1.4% for the cheapest valued properties.
It is important to consider stamp duty rules on a state by state basis whenever real property or business assets are acquired or transferred as rates can vary significantly, while certain transactions may receive concessions or exemptions.
Payroll tax is imposed on employers whose annual wages paid to employees exceed a set amount determined by each state. The tax is generally between 3% and 7%.
Payroll tax is currently payable in New South Wales at a rate of 5.45% for businesses who pay more than $750,000 in annual wages. By comparison, Victoria sets its threshold annual wages level at $550,000 and its rate of payroll tax at 4.9%.
Individuals and other entities who own land in Australia over a prescribed value are liable to pay land tax annually on the combined value of all taxable land owned.
Again, the rate payable varies between states, while some states exempt certain classes of land such as one’s principal place of residence, land used for primary production (for example, farming) and land used by charities, religions and schools.
New South Wales and Victoria use progressive scales of taxation in relation to land tax. The minimum threshold land values above which land tax must be paid are $406,000 and $250,000 in New South Wales and Victoria, respectively.
Further, whilst the rate payable depends on the value of the land owned, the range of rates is 0-2% and 0-2.25% for the same states, respectively.
Motor vehicles duty
Motor vehicle duties are often payable where a motor vehicle is registered in or transferred within a certain state. The duty is paid by the purchaser with the applicable rate of duty generally depending on the type of car and the circumstances surrounding its transfer.