Intro to Aussie Tax
In Australia income tax on individuals is the largest source of the Federal’s government revenue. Paying tax is the duty of all good patriots and citizens. However overpayment of tax is not noble, it’s idiotic.
Kerry packer said it best : “Now of course I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”
In order to optimise your tax you’ll need to understand the system so that you can use all legal methods of minimising your tax liability.
The Basics of Income Tax for Individuals
Assessable Income – Allowable Deductions = Taxable Income
Assessable Income is generally any income you receive in a commercial or business environment such as wages, interest, dividends, trust distributions and business income.
Allowable deductions are the expenditure incurred to derive the assessable income. Let me clarify this by saying that the law has very clear rules about how relevant or linked a particular expense has to be to a source of income in order for it to be deductible. This is called the nexus of the expenditure. Expenses can be barred from being deductible by being incurred too early or too late in relation to the income or not having sufficient “nexus”.
Note: The Australian tax year is the same as the Australian financial year meaning it spans from 1 July through 30 June, rather than the normal calendar year.
Once taxable income is known, the actual tax liability paid is found by applying the relevant income tax thresholds. The Aussie tax system is progressive, meaning that as your income increases the relative percentage of tax payable increases.
The following tax thresholds are for the 12-13 and 13-14 financial years.
Tax on this income
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $80,000||$3,572 plus 32.5c for each $1 over $37,000|
|$80,001 – $180,000||$17,547 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,547 plus 45c for each $1 over $180,000|
For example, if your taxable income is $40,000. Then your primary tax liability is:
= $3,572 + (40,000-37,000) x 0.325
Of course the fun doesn’t end there, as if you have income over $20,542 (or $32,279 if your eligible for tor the seniors and pensioners tax offset) then the Medicare Levy also applies.
This levy is generally 1.5% of your taxable income but is reduced if your income is lower than $24,168 (or $37,976 if your eligible for tor the seniors and pensioners tax offset).
To continue our previous example:
Total Tax Liability
= $4,547 x 1.5%(40,000) = $5,147
This liability is then netted off against any installment or withheld tax that you have paid or has been paid on your behalf throughout the year.
If the person in our example had earned the entirety of their income via a salary and was paid fortnightly Then their employer will have withheld $196 of their wages each fortnight and paid it to the ATO on the employee’s behalf. This totals $5,096 for the year, meaning that our tax payer has the difference ($5,147 – $5,096 = $51.) still to pay. The ATO will ask for this amount when the taxpayer lodges their tax return.
In this case, this hypothetical taxpayer has an effective tax rate of 12.86~%, So there you have it, the basics of our tax system, further posts will explain how your investments and lifestyle can influence your interaction with the tax regime.