Income tax in Australia

Income tax in Australia

Broadly, Australia levies tax on three sources of income for individual taxpayers: personal earnings (for example, salary and wages), business income, and capital gains. Income received by individuals is taxed at progressive rates. 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.

In Australia the financial year runs from July 1st to June 30th the following year and is most commonly referred to by the year that it finishes in (e.g. 1 July 2005 - 30 June 2006 is the 2006 financial 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.


Tasmania was the first state to introduce income tax. It did so in 1880. 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 income tax.Fact|date=September 2008

Personal Income Tax

Income tax on personal income is a progressive tax. The current tax-free threshold is AUD6,000 and the highest marginal rate for individuals is 45% (plus medicare levy).

As with many other countries, income taxes are withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit Tax File Number 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 highest marginal rate 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 tax file number to the bank. Corporate and business taxpayers are required to provide their tax file number or "Australian Business Number" 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 tax file number or Australian Business Number, however the bank or financial institution will be required to withhold income tax at the highest marginal rate of income tax.

Low Income Tax Offset

The Low Income Tax Offset is an offset applicable in full for those earning up to $30,000. Since the 2008-09 Budget it provides low income earners with a tax rebate of up to $1200.From 1 July 2008, the LITO will increase from $750 to $1,200. It is withdrawn gradually as an income exceeds $30,000. [ 2008-09 BUDGET PAPER NO. 1] page 15.] The rebate phases out for those earning over $30,000 at 4c for every dollar of taxable income over $30,000. Thus the threshold ends at $60,000. The LITO effects the amount of income per child that can be diverted to children through family trusts [The LITO applies to eligible income of minors that is normally tax at penalty rates. Ref to the ATO [] ] . The LITO creates an effective tax-free threshold of $14,000 for low income earners, but an increased effective marginal tax rate (EMTR) for middle income earners (an increase of 4% in the effective marginal tax rate for incomes up to $60000 per annum).

Tax rates

Income Tax Rates 2008-09 - excluding Family Tax Benefit [Taken from [ Federal Government Budget] ]

The Medicare levy applies to certain thresholds

Income Tax Rates 2005-06 - excluding Family Tax Benefit [Taken from the ATO [ website] ]

The Medicare levy applies to certain thresholdsThe Medicare levy can be calculated at this [ website] ]

Income Tax Rates 2003-04 [Taken from the ATO [ website] ]

The Medicare levy applies to certain thresholds

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.

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 for FTB 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.


ee also

*Income tax
*Constitutional basis of taxation in Australia

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