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Understanding the Australian Income Tax System

By H&R Block 6 min read

What is income tax?

Income tax is the most significant stream of revenue in the tax system, it consists of three main pillars:

Income tax is applied to an individual’s taxable income and is paid on all forms of income. This includes wages from your job, profits from business and returns from investments. Income tax can also apply to assets such as when a house or shares are sold.

Taxpayers with two or more jobs or other taxable income sources should be aware that they may be caught in an unintentional tax trap as a result of the tax free threshold.

Income tax rates

Australia has a progressive tax system, which means that the higher your income, the more tax you pay.

You can earn up to $18,200 in a financial year and not pay tax. This is known as the tax-free threshold and after which, the tax rates kick in.

Tax rates for residents in the 2020/21 and the 2021/22 year are (Note: these rates do not include the Medicare levy):

Taxable income $ Tax payable $

0 - 18,200

Nil

18,201 - 45,000

Nil + 19% of excess over 18,200

45,001 - 120,000

5,092 + 32.5% of excess over 45,000

120,001 - 180,000

29,467 + 37% of excess over 120,000

180,001+ 51,667 + 45% of excess over $180,000

 

The lowest rate is 19% and the highest rate is 45%, which is only charged on income over $180,000. Most Australians sit in the middle bracket.

You are also taxed on superannuation contributions and earnings, and there are several tax benefits to paying money into your fund.

Tax rates for foreign residents for the 2020/21 and the 2021/22 year are:

Taxable income $ Tax payable $

0 - 120,000

32.5%

120,001 - 180,000

39,000 + 37% of excess over 120,000

180,001+

61,200 + 45% of excess over $180,000

 

Working holidaymakers (visa types 417 and 462) pay 15% on all income up to $45,000 then resident rates on all income from $45,001 onwards 

Lodging your return

Lodging your tax return can be done anytime after June 30 and the absolute deadline for self-lodgement is the 31st October. Whilst there is the option to self lodge, it is best to go through a tax agent such as H&R Block, to ensure everything is filled out correctly and you receive the best return possible in a timely manner.

In order to ensure the lodgement process is as smooth as possible, make sure you have all your important documents together before coming in for your appointment or lodging online. Filing away important receipts, invoices and documents throughout the year will save you a lot of time when it comes to completing your return. It’s also important to ensure all your details are up to date. If you’ve moved or changed your name, these details need to be updated with the ATO. Minor errors like these can hold your return up for weeks or even lead to fines.

If you're retired or have access to your super fund, it is important that you are fully aware of your tax obligations. People of different ages have different levels of obligations when it comes to tax on superannuation withdrawals.

Deductions

Tax deductions are expenses that you have incurred during the financial year for work purposes. Overall, tax deductions reduce taxable income and are often the reason why people get a tax refund.

Any money spent as part of your work is tax deductible. If you spent money on something to allow you to do your job you are entitled to claim that cost as a deduction. For example, travel expenses for work purposes or the cost of uniforms. If you use your personal laptop, desktop, tablet or phone for work, you can claim a deduction for work-related use of the device. Below are a list of tax tips to help you understand tax deductions:

It is important to remember to only claim what you’re entitled to. Private expenses or any costs that were reimbursed by your employer cannot be claimed. Claiming what you’re not entitled to can lead to fines and a stressful audit by the ATO.

If you’re unsure of what you can and can’t claim, watch this short video or contact your nearest H&R Block office for further information.

June 2017

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