An Overview of Taxation in Australia

Australia's taxation system comprises federal, state, and local levels of governance. This framework ensures the provision of essential services through a mix of direct and indirect taxes. Understanding this system is crucial for individuals and businesses to fulfill their tax obligations while optimising their financial management. We explore the multifaceted layers of Australia's tax regime, discussing the roles of each level of government and highlighting key taxes and duties levied across the nation.

Governing Australia's Tax System

In Australia, there are three levels of government that work together to provide the necessary services. The Australian tax system is a mix of direct and indirect taxes levied by the federal, state and local governments. These three levels of government have various ways and means to set tax laws so they can balance their budgets.

The three levels are:

• Federal (income tax, GST);
• State (stamp duty, land tax, payroll tax);
• Local (council rates, water charges);

At the time of the Henry Review, the report made the point that there are at least 125 taxes in Australia, but 90% of the total tax revenue is collected by 10 of these taxes. Thankfully, you won't see the majority of these 125 taxes on a regular basis when operating your business.

Federal level taxes

The Australian government has the right to tax citizens on their income from all sources, while non-residents are only subject to taxes on earnings derived within Australia. To identify who is a resident in terms of taxation, there are certain definitive rules set by current legislation that cover both residency and source of income.

Income Tax

Income taxes are levied on taxable income which is generally an entity's total assessable income less any allowable deductions.

Assessable income includes items such as salaries, wages, business income, interest, rent and dividends.

Deductions generally include expenses that have been incurred in the course of gaining or producing said income, in addition to a number of specific deductions allowable under legislation.

Capital Gains Tax

Capital Gains Tax (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 capital gains tax are very broad and include both tangible and intangible assets. Real estate, shares & businesses are examples of CGT assets.

Capital gains are included in taxpayers' assessable income and therefore taxed at each taxpayer's applicable income tax rate (see below, taxation of different entities).

Certain exemptions & concessions exist for assets such as motor vehicles, personal use assets and the main residence. Capital gains tax can be complicated, so we have provided more information on this specifically.

Taxation of different entities on income & capital gains

Individuals

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 personal 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.

Australian Residents for income tax purposes

For the 2023-24 income year (1 July 2023 to 30 June 2024), the following individual income tax rates apply in relation to Australian residents:

Tax on this income

• $0 - $18,200 Nil
• $18,201 - $45,000 - 19 cents for each $1 over $18,2000
• $45,001 - $120,000 -$5,092 plus 32.5 cents for each $1 over $45,000
• $120,001 - $180,000 - $29,467 plus 37 cents for each $1 over $120,000
• $180,001 and over - $51,667 plus 45 cents for each $1 over $180,000

‍The above income tax rates do not include the Medicare levy surcharge of 2%.

Non-residents for income tax purposes

Non-residents are taxed on their Australian-sourced income in the 2022-23 income tax year in accordance with the following rates:

Tax on this income

• $0 - $120,000 - 32.5 cents for each $1
• $120,001 - $180,000 - $39,000 plus 37 cents for each $1 over $120,000
• $180,001 and over - $61,200 plus 45 cents for each $1 over $180,000

Companies

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 a flat rate regardless of the company's level of income.

The company tax rate in Australia is 30% or 25% if the business meets certain eligibility criteria.

Dividends paid by companies to their shareholders are included in the shareholders' assessable income and are subject to an ‘imputation system'. The purpose of this system is to pass on a ‘credit' (known as franking credits) to shareholders for the company tax paid on the profits from which dividends are paid. This imputation system ensures that dividends are ultimately taxed at each shareholder's applicable income tax rate, and removes double taxation so the company as well as the shareholder are not having to both pay tax on the amount. Access to credits, however, only applies to Australian resident shareholders.

Trusts & Partnerships

Trusts & partnerships, while different legal entities, share some common characteristics in that they (in most circumstances) don't pay tax at the entity level (unlike a company) but instead 'distribute' this taxable income through to the beneficiary (for trusts) and partner (for partnerships).

Generally, the tax rates that would apply are the underlying beneficiary or partner's marginal tax rate.

Goods and Services Tax (GST)

GST is a consumption tax (similar to consumption taxes like Value Added Tax in other countries) and is applied on the sale of almost all goods and services in Australia as well as those imported into the country.

This broad-based taxation system has been put in place with a flat rate of 10%. A consumer will be liable for GST when making a purchase. Businesses or individuals who run an enterprise that meet an annual turnover threshold must register themselves with this taxing scheme.

Some supplies such as health, education and food are excluded from GST.

Fringe Benefits Tax (FBT)

Employers are required to pay Fringe Benefits Tax (FBT) on the value of non-cash benefits they give their employees. Generally speaking, these fringe benefits need to be associated with employment for them to become taxable; although some exceptions exist as specified by Australian legislation.

As of the 2024 financial year, FBT is taxed at a flat rate of 47% and may be deductible against the employer's taxable income.

Medicare Levy

Australia's Medicare scheme is a public health insurance system that relies on taxes paid by Australians through the Medicare Levy and the Medicare Levy Surcharge. These levies are collected from residents' taxable income, allowing anyone in Australia access to necessary healthcare services.

• The Medicare Levy is imposed at a flat rate of 2% 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.

Luxury Car Tax

The Australian government levies a 33% luxury car tax on all cars imported or purchased in Australia that cost more than $76,950 or $89,332 for fuel-efficient vehicles.

Such rules outlining what constitutes a luxury vehicle depending on its fuel consumption are also outlined by the government for those who choose to purchase such high-end vehicles.

Taxation on International Transactions (Double Taxation)

While typically, international dealings are governed by the nation in which contracts were signed, there may be exceptions based on certain circumstances. A major problem with residence and source rules is double taxation — when a single stream of income has to be declared for two distinct nations (see the piece below about double taxation).

To ensure taxation is only imposed once on any given income, Australia has established multiple double tax agreements with other countries which take precedence over domestic law. This safeguards against the burden of being taxed twice for a single sum.

Furthermore, Australia also has a foreign tax credit system in place whereby taxpayers can get credit for taxes paid on foreign income. This credit helps to reduce the amount of Australian taxation that needs to be collected from the same source, so as to ensure double taxation is minimised or eliminated entirely.

Customs duty

The Australian federal government has the authority to impose taxes on any goods imported into Australia; this levy is referred to as custom duty. This tax must be paid when merchandise enters the country, usually at a rate of 5% of its ‘customs value' – however, this can change depending on what type of item is being brought in.

Excise duty

Excise duty is charged on items such as alcohol, tobacco and petroleum products produced or manufactured within Australia. For imported goods rather than domestically-produced ones, customs duty applies with a rate commensurate to the excise one (see Customs Duty above). The manufacturer or distributor bears this flat tax rate – which may be revised twice yearly in light of inflationary shifts.

Most activities involving excisable goods necessitate the obtaining of an appropriate license beforehand.

State level taxes

State jurisdiction to impose taxes

States and Territories in Australia have jurisdiction to impose various taxes and duties.

Taxes at the state level are most commonly taxes on immovable property situated in that particular State, as well as on various other state-based transactions such as car registration and employment.

Different State and Territory taxes and duties exist throughout Australia, so one must contemplate the applicable tax law in each jurisdiction before making a decision.

Nonetheless, some of these common forms of state taxation are mentioned below.

Stamp Duty

Stamp duty is required for certain purchases, such as real estate and shares in landholder companies. It's the buyer who pays this fee instead of the seller. The amount payable varies from state to state but typically ranges between a fixed rate or one based on the value of your transaction.

When buying or selling property or business assets, it's essential to be familiar with the stamp duty rates and concessions in your state as they can differ drastically. Certain transactions may even receive exemptions from these costs.

Payroll Tax

Payroll taxes are imposed on organisations whose annual wage expenditures paid to employees exceed a set amount determined by each state. Payroll tax rates are generally between 3% and 7%.

Payroll tax is currently payable in Queensland at a rate of 4.75% for businesses who pay more than $25,000 in Australian taxable wages per week.

By comparison, Victoria sets its monthly wage threshold level at $58,333 and its payroll tax rates at 4.85%.

Land Tax

Entities that possess land holdings above a certain amount must pay an annual tax on the aggregated worth of all taxable lands they own. The rate payable fluctuates across states, with some exceptions such as one's primary residence and any properties used for farming or charitable purposes.

Queensland uses a progressive scale for land tax. The minimum threshold land value above which land tax must be paid is $600,000 for individuals and $350,000 for companies and trusts.

While the rate payable depends on the value of the land owned, the range of rates is generally between 1 and 2.5% across the various states.

Administration of Australia's taxation system

Self-assessment

The Australian taxation system is based on a self-assessment model, where taxpayers are responsible for ensuring their taxation affairs are complete and correct.

The federal government administers the system through the Australian Taxation Office (ATO). 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.

Individuals and companies are required to lodge an annual ‘Income Tax Return', while business operating through company structures and various other entities may have further requirements such as activity statements & PAYG requirements (see below, Withholding taxes).

The ATO does undertake audits of individuals' and companies' tax returns to ensure that a taxpayer's actual tax affairs are consistent with the self-assessment lodged, so it's important to work with a knowledgable tax accountant.

Activity Statements

If you are a business registered for GST you need to lodge a business activity statement (BAS).

The following information is reported and paid in the activity statement:

• goods and services tax (GST)
• pay-as-you-go (PAYG) instalments
• PAYG withholding tax
• other taxes (such as FBT).

The cycle for completing activity statements is generally monthly or quarterly.

Pay-As-You-Go Withholding Taxes (PAYG)

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 purpose of Australia's withholding tax rules is to enable the efficient and timely collection of tax revenue on an ongoing basis.

The amount withheld broadly represents the income tax payable on that salary or wage and must be remitted to the ATO usually through activity statements (refer above section).

The obligation to withhold 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 on Dividends, Interest & Royalties

To ensure the correct payment of taxes, Australian residents are required to withhold a percentage on dividends, interest or royalties paid to foreign entities. The rate for withholding can be found in the appropriate double tax agreement.

Australian Business Numbers & Tax File Numbers

An ABN is your business's unique identifier which conveys to the ATO, government entities and other businesses that you are a legitimate organisation.

The Tax File Number (TFN) is an important tool that assists the ATO in administering Australia's tax system. It is used by people and organisations alike to confirm their identity when dealing with taxation-related matters.

Having a TFN is not mandatory but highly recommended since without one, income tax will be withheld from earnings at the highest rate — without a tax refund. This applies to particular types of revenue, such as salary and wages or some forms of investment income.

How we can help?

It is important to remember that while Australia's taxation system is complex, with the right knowledge, advice & assistance, compliance with Australia's taxation system can be achieved without too much difficulty.

If you need more advice on this issue, please contact our team.

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