Income tax in Australia is the most critical revenue stream within the Australian taxation system and like it or not, as a resident of Australia, you’re liable to pay income tax on income from all sources.
Thankfully, one exception to this rule is the funds that you bring into Australia when you originally emigrate, and for most of us, Australia has a number of Double Taxation Agreements with some other countries.
These agreements mean that, in most cases, tax is imposed only by the country of residence of the taxpayer so if you’ve already paid tax on your income (such as, on your savings), then you won’t be taxed on this income again when you bring these funds into Australia.
Despite their name, double-taxation agreements are designed to prevent you from paying taxes twice! Under double-taxation agreements, specific categories of foreign residents are exempt from paying Australian tax.
List of countries with whom Australia has Double Taxation Agreements
Australia has double-taxation agreements with many countries, including Argentina, Austria, Belgium, Canada, China, the Czech Republic, Denmark, Fiji, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, the Republic of Korea, Malaysia, Malta, the Netherlands, New Zealand, Norway, Papua New Guinea, the Philippines, Poland, Romania, Singapore, the Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, the UK, the US and Vietnam. If part of your income is taxed overseas in a country with a double-taxation treaty with Australia, you won’t be required to pay Australian tax on that income.
Foreign employees working in Australia for Australian companies or organisations are subject to Australian tax on their earnings. However, if your stay is less than six months, you’re usually taxed at the (higher) rates applicable to non-residents, although double-taxation agreements contain particular articles dealing with directors, entertainers, government services, professors and teachers, which may alter this position. Salary and wage income earned by residents from services performed overseas is exempt if you’ve been employed outside Australia for a continuous period of at least 91 days, provided the income has been taxed abroad.
So am I an Australian Resident for tax purposes?
There are four tests to determine whether a person is a resident for income tax purposes. An individual can be classified as a resident for taxation purposes if they are
- making contributions to a Commonwealth superannuation fund,
- in Australia for more than half the year,
- have their domicile or permanent place of abode in Australia or finally
- if they dwell permanently or for a considerable time in Australia.
A company will be considered an Australian resident for taxation purposes if it falls under any of the following three criteria:
- incorporated in Australia,
- carries on business in Australia and central management and control is in Australia or
- carries on business in Australian and Australian resident shareholders control it.
Personal Income Tax in Australia
Income tax on personal income is a progressive tax, which means the more you earn, the more tax you pay. The current tax-free threshold (as of the date of this post) is $18,200, and the highest marginal rate for individuals is 45%.
In addition, most Australians are liable to pay the Medicare levy, of which the standard is 1.5% of taxable income.
As with many other countries, income tax is withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit Tax File Number (TFN) must be quoted to employers for employees to have withholdings calculated using the various tax brackets.
While it is not an offence to fail to give a bank or financial institution with a TFN, in the absence of this number, employers are required to withhold tax at the rate of 46.5% (the highest marginal rate plus Medicare levy) from the first dollar. Likewise, banks must also withhold the highest marginal rate of income tax on interest earned on bank accounts if the person does not provide their TFN to the bank.
The below table details the Individual income tax rates for Australian residents for the financial year 2018-2019
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,001 – $180,000||$20,797 plus 37c for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45c for each $1 over $180,000|
The above rates do not include the Medicare levy of 2%.
Low-Income Tax Offset
The Low Income Tax Offset (LITO) is a tax rebate for individuals on lower incomes. From 1 July 2010, it provides individuals earning less than $30,000 with a tax rebate of $1,500. The full offset is reduced by 4c for every dollar of taxable income above $30,000, meaning incomes higher than $67,500 do not receive any benefit. The LITO creates an effective tax-free threshold of $16,000 for low-income earners. For the 2011-2012 tax year, 70% of the LITO entitlement is received as reduced withholding tax; the balance is received when a tax return is lodged.
Collection of Income Tax
Income tax in Australia is collected by means of a withholding tax system known as Pay-as-you-go (PAYG).
For employees with only a single job, the level of taxation at the end of the year is close to the amount due, before deductions are applied. Discrepancies and deduction amounts are declared in the annual income tax return and will be part of the refund which follows after yearly assessment or alternatively reduce the tax debt that may be payable after assessment.
So there we have it. I hope you found the guide useful and as always feel free to ask any questions using the comments option below.
As a final comment, please remember that rates change. In Australia, the financial year runs from 1 July to 30 June of the following year, so this article will be current until 30th June 2019. If you’re viewing this document after this date, then check out the website of the Australian tax office for the latest rates. The Australian Tax office’s site can be viewed by clicking here (opens in a new window).