There probably isn’t a more boring subject in this world than taxes.

The mating cycle of a moth would be more exciting to learn about.

But if you are looking for a really quick overview and reference guide to how tax works in Australia, then look no further. This is the Australian tax system explained.

This overview also shows you how to reduce taxable income in Australia.

Save this as a bookmark, so that you can have all the basic information you need at your fingertips.

I have collated some common everyday questions about how tax works in Australia and have provided succinct answers to each question.

Hope it helps!

1. Why Do We Pay Tax in Australia?

Tax is what makes Australia go ‘round. By paying tax we are contributing to society in a way that allows our Government to provide healthcare services, social security, education, defence, roads, parks, and so on…. Many things that we take for granted in our everyday life.

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2. When Did Income Tax Start In Australia?

Income Tax was first introduced into Australia in 1915 in a bid to fund the First World War. Legislatively, the Taxation Administration Act 1953 was assented to on March 4 1953.

3. How Much Tax Should I Be Paying in Australia?

There are dozens and dozens of types of taxes in Australia. Some of these taxes you probably don’t even consciously realise you are paying. You would probably have a coronary if you realised how much tax you actually pay through various avenues.

The big dog of all taxes is Personal Income Tax and this accounts for about half of Government revenue . Income tax is what you pay on all of the income that you earn, such as salary, wages, business income, bank interest, rental income, share dividends, etc.

Basically, the more you earn, the more tax you pay.

As well as Personal Income Tax, there are also a heap of other taxes such as Capital Gains Tax (CGT), Goods and Services Tax (GST), Superannuation Tax, Company Tax, Fringe Benefits Tax, and the list goes on.

At the end of the day, how much you earn and how much you spend on trying to earn will determine how much tax you should be paying in Australia. Most taxes are based on how much you earn and others are based on how much you consume.

4. How Much is the Income Tax in Australia?

Income tax in Australia for permanent residents is based on a tax bracket system. Different levels of your income will be taxed at different tax rates. The tax rate increases as your income increases.

5. Current Australian Tax Brackets

A financial year in Australia is from 1 July to 30 June of each year. The current tax rates in Australia for the 2016/2017 financial year are as follows:

Taxable Income Tax on This Income
$0 – $18 200 Nil
$18 201 – $37 000 19 cents for each $1 over $18200
$37 001 – $87 000 $3 572 plus 32.5 cents for each $1 over $37000
$87 001 – $180 000 $19 822 plus 37 cents for each $1 over $87000
Over $180 000 $54 232 plus 45 cents for each $1 over $180000

Medicare levy of 2% applies (not applicable to low income earners)

So, looking at the table above, you can see that the lowest tax bracket in Australia, apart from 0% up to $18,200, is 19% (plus Medicare Levy). And what is the highest tax rate in Australia? The highest tax rate is a whopping 45% (plus Medicare Levy).

6. Current Australian Tax Rates for Non-Residents

The current non-resident tax rates in Australia for the 2016/17 financial year are as follows:

Taxable Income Tax on This Income
$0 – $87 000 32.5 cents for each $1
$87 000 – $180 000 $28 275 plus 37 cents  for each $1 over $87000
Over $180 000 $62 685 plus 45 cents for each $1 over $180000

Based on the tables above, depending on whether you are a resident or non-resident, you can see what the current tax rate in Australia is and determine what percentage tax you pay in Australia.

7. How Much Can I Earn Before Paying Tax in Australia?

The tax bracket tables above show that you can earn $18,200 in income before paying tax in Australia. However, as a non-resident, you pay tax on all income.

8. If I Earn $50,000 p.a., How Much Tax Would I Pay in Australia?

Based on the 2016/2017 financial year, if you were to earn $50,000 over the year, you would be taxed as follows:

Income Tax = $3,572 + (0.325 x $13,000) = $7,797

You would also pay the Medicare Levy of $50,000 x 2% = $1,000

But, you would be eligible for the Low Income Tax Offset equal to $445 – (0.015 x $13,000) = $250

So, all in all, you would be obliged to pay income tax of $8,547 (including the Medicare Levy)

You are required to pay income tax on bank interest and saving interest in Australia too, as well as rental income and share dividends.

9. How To Reduce Personal Income Tax in Australia

There are plenty of ways to reduce tax in Australia and tax minimisation strategies available to Australian taxpayers.

Here is some potential tax saving tips for salaried employees:

• Car expenses, including fuel costs and maintenance
• Travel costs
• Memberships or union fees
• Tools and equipment
• Subscriptions to employment related magazines or journals
• Home computer costs or phone expenses
• Clothing costs and care for clothing

The costs above may be able to be claimed as a tax deduction, which can reduce the level of income that is assessed at the tax brackets detailed above.

In general, you will needs to keep a record of all expenses that you wish to claim as a tax deduction.

Other types of deductions that can be claimed to reduce personal income tax may be:

• Gifts and donations
• Costs relating to managing your tax affairs
• Investment loan expenses relating to income producing investments

The items listed above are some common tax deductions in Australia – just a handful of ways of how to save tax on your salary and save on income tax in Australia.

It is a good idea, before submitting your tax return, to research tax deductions available to you, as it will help you to figure out how to get more tax back. Start with the common tax deductions available in Australia, as listed above, and then delve more into the types of deductions specific to people in your industry or job.

10. How Do Tax Deductions Work in Australia?

A tax deduction is an expense incurred that reduces the amount of your income that is taxed at the marginal tax rates noted above.

So, let’s say that you had total tax deductions in the 2016 / 2017 financial year of $5,000 and your income for the year was $50,000 – like in our example above – then your assessable income for tax purposes would only be $45,000 ($50,000 – $5,000).

Therefore, your income tax would be = $3,572 + (0.325 x $8,000) = $6,172

You would also pay the Medicare Levy of $45,000 x 2% = $900

But, you would be eligible for the Low Income Tax Offset equal to $445 – (0.015 x $8,000) = $325

So, all in all, you would be obliged to pay income tax of $6,747 (including the Medicare Levy)

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11. Tax for Married Couples in Australia

Unlike some other countries, Australian residents are taxed on an individual level. Therefore, your spouse or partners’ income is irrelevant when calculating how much income tax you will pay in Australia.

12. Working From Home Tax Deductions in Australia

Working from home opens up the possibility for a few more tax deductions. But you need to differentiate between working from home and running a business from home.

For example, you may be able to claim a deduction for some or all of the following if you simply do some work from home:

• Costs of using a room’s utilities, such as gas and electricity
• Work related phone calls

However, if you run a business from home, you may be able to claim the following deductions:

• Costs of using a room’s utilities, such as gas and electricity
• Work related phone calls
• Rent, mortgage interest, insurance, rates, etc.
• Decline in value of office equipment such as desks, chairs, computers, etc.

One thing to be very careful of if you decide to claim any part of the interest on your mortgage is that it may affect your ability to sell your home tax free. You see, currently in Australia, your principal place of residence can be sold and any capital gain resulting from the sale is exempt for capital gains tax (CGT) purposes. However, if you are claiming the interest on your home mortgage, for work purposes, when it comes time to sell the home, part of any capital gain may be assessed for CGT purposes, sue to claiming part of the mortgage interest as a tax deduction.

13. How Long Do Tax Returns Take in Australia?

Unfortunately, the old school paper based tax returns can take around 10 weeks to be processed. The modern electronic approach can be processed in 2 weeks. You are unable to accelerate these processing times, so don’t bother trying to phone the big house and expect them to put your tax return at the top of the pile.

14. How Long Do I Need To Keep Tax Returns?

The Australian Tax Office says that, in general, you must keep written evidence of your tax records for five years from the date you lodge your tax return.

15. How To Do a Tax Return Yourself in Australia?

You can lodge your own tax return using myTax – a process developed by the Australian Taxation Office (ATO). myTax takes you through the process step-by-step, To get started, you will need a myGov account.

If you do decide to do your tax return yourself, you will need to lodge it by the 31 October deadline.

Watch this short video to get started

16. What is the Australian Company Tax Rate?

Generally, companies with turnover of more than $2 million are taxed at 30%. The Australian company tax rate for small businesses is 27.5% in the 2016/2017 financial year.

Author: Chris Strano

After playing a vital role in the creation of his two sons, Chris Strano gave up his former-life as a financial adviser to dedicate his time to providing everyday families with basic money management advice. Drawing on his years of education and experience, he has also developed an affordable 100% digital course showing young families how to build their own custom household budget and savings plan to work towards their goals, using financial planning strategies (without the cost of a financial adviser). You too can get started by grabbing his free 6-Step Budget Cheat Sheet at Build A Family Budget and follow him on Facebook and Instagram @SmartFamilyBudget.