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Taxation in Australia

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When talking about taxation in Australia, it is important to understand the territory principle. Australia is a huge country ruled by one Commonwealth (federal) government and by territory governments of all 8 states. Both the central government and the local ones can impose taxes.

It is remarkable that Australian tax system is based on the principle of self-assessment and responsibility. Taxpayers (companies/individuals) file their tax returns annually, and the Australian Tax Office (authority that manages collecting taxes and developing national taxation strategy) doesn’t check each filing for truthfulness. The ATO audits tax returns selectively and always takes measures in case of cheating.

In our guide we will analyse various taxes in regard to the territory a taxpayer is located in and give recommendations about handling filing taxes in the most efficient way.

Principles and Features of Australian Taxing

  • Taxation of income is based on the principle of residence. There are specific rules for determining the tax residence as well as the source of income which is usually a place of either employment or business. Income of Australian tax residents is taxed regardless of its source while non-residents have to pay taxes only for income earned in Australia.
  • A person is a tax resident if they
    1. work in Australia for at least 6 months (and their employer pays the Superannuation tax to the employee’s pension fund) or
    2. have an Australian domicile or
    3. live permanently in AU for a long time.
  • A company is a tax resident if it
    1. is incorporated in AU or
    2. does a business in AU that is managed and controlled from inside Australia or
    3. does a business in AU whose general shareholders are Australian residents.
  • The federal government gets around 67% of its revenue from the income tax which is collected from capital gains and incomes of companies and individuals.
  • Assessable incomes (wages, salaries, business revenues, rents, interests, or dividends) are subject to taxing in Australia. Deductions for expenses that happen in the process of gaining income are applicable unless these expenses have a capital nature or belong to personal expenses.
  • Capital Gain Tax is imposed on the income earned from the sale of tangible/intangible assets. It is considered as a part of the income tax. It is possible to get exemptions for the sale of cars and main personal property. For foreigners, the number of taxable capital gains is limited to the sale of real estate.
  • To avoid exposing the same income to taxes in 2 different countries, Australia has signed a number of agreements for avoiding double taxation, and these agreements are superior to the tax obligations prescribed by the local law. Australian residents who pay an overseas tax for the income earned overseas get tax credits in order to compensate the local Australian tax imposed on the same income.

Commonwealth Tax Types

Individual Income Tax

As mentioned above, income taxation of an individual would include the income tax and the capital gain tax depending on the income’s source. Taxation starts from 18.2k AUD. For annual incomes higher than this amount of money, the rate is applied and it grows as the income grows. For example, for the income ranging from 18.201k AUD to 37k AUD, the rate is 19%. For the income that exceeds 37k AUD and doesn’t exceed 80k AUD, there is a fixed tax of 3.572k AUD and additional rate of 32.5%. And so on. Incomes over 180k AUD are taxed with the fixed tax of 54.547k AUD and the additional rate of 45%.

Foreigners arriving in Australia for work can get qualified as temporary residents in order to get tax reductions. Non-residents earning income on the territory of Australia get taxed according to this scheme:

  • 0 AUD – 80k AUD: 32.5%;
  • 80.001k AUD – 180k AUD: the fixed tax of 26k AUD + 37%;
  • More than 180k AUD: the fixed tax of 63k AUD + 45%.

If a foreigner owns a property overseas and gets income or capital gains from it, declaring this interest in Australia is mandatory. Do it when you file your tax return. If a foreigner has already paid the tax from this interest overseas, they can claim the tax offset for it in Australia in accordance with double taxation agreements.

Company Income Tax

The same as an individual, a company, which usually has a limited liability in Australia, must pay taxes for its earned income in accordance with principles of tax residency and the source of income. The difference is that companies enjoy a flat rate of corporate tax (30%) irrespective of the amount of income. This rate is one of the most sizeable in the Pacific area and contrasts with such corporate tax havens as Singapore (17%) and Hong Kong (16.5%).

Unlike Singapore, Australia taxes dividends, and, therefore, shareholders getting them must pay a tax for them the same as for other assessable income. Resident shareholders are ahead of the game because, unlike non-residents, they can get dividend credits.

If a number of companies consolidate into a group, they are permitted to consolidate their revenue, and this way, transactions won’t be taken into consideration which gives companies a significant relief in paying their income taxes.

Goods and Services Tax

GST is applied when goods and services are being sold in Australia or imported. Exemptions are salaries, unprocessed food, real estate, education, health products and services, and export. The tax is also imposed on new residential and non-residential properties, but resale is free of the GST. The flat rate for the GST down under is 10% (for comparison: it is 20% in the UK and France and 25% in Norway, Denmark and Sweden, but 7% in Singapore).

All companies whose annual turnover exceeds 75k AUD have to get registered for paying the GST. A registered company has to add the value of this tax to the cost of products and services it produces and sells, and afterwards, return the difference to the Australian Taxation Office. Every quarter, such companies must file a Business Activity Statement with the Taxation Office.

Medicare Levy and Surcharge

In order to get covered by the national healthcare and insurance scheme called Medicare, all citizens and residents have to pay a levy of 1% from their taxable income. People with low incomes (less than 20.896k AUD per annum), as well as foreigners, are exempts for this tax. Those individuals whose annual income ranges from 20.896k AUD to 26.121k AUD (33.044k AUD and 41.306k AUD accordingly for seniors/pensioners) can get the levy reduction.

On the other hand, Australian top earners (earn over 90k AUD if single or over 180k AUD if have families) who don’t have a comprehensive private health insurance have to pay the Medicare Tax Surcharge of 1%.

Fringe Benefits Tax

All cashless benefits obtained by the employee from their employer are subject to the Fringe Benefit Tax. The tax must be paid by the employer at the rate of 46.5% from their taxable income.

Withholding Taxes

If a special payment (such as royalty, interest, rental, and so on) is made by a company or an individual to a non-resident, a withholding tax is imposed on the payer. They must withhold a certain percentage of the payment and submit it with the ATO afterwards. This way, the Australian tax authority ensures that Australia-sourced profits are taxed. The rate of this tax depends on the payment and is unique in every situation. Double tax agreements are taken into consideration while setting the rate for the Withholding Tax.

Pay-as-you-go is another type of Withholding Tax practised in employment. The employer withholds a certain percentage from the salary/wages and passes it to the ATO as an instalment for the income tax, Superannuation Tax, Medicare Levy, and loans for higher education (HELP). Such regular instalments allow the system to calculate the individual’s annual taxable income. When filing a tax return annually, the employee is able to point to any discrepancies or deductions and get refunded or get their tax debt reduced. If a company makes a payment to another company that isn’t able to provide its ABN (Australian Business Number) or a Tax File Number, the payer must withhold a certain amount (usually 46.5%) for paying the tax.

Superannuation Tax

In Australia, every working individual is able to build up their retirement fund. Their employer pays the superannuation guarantee which minimum level is 9.25%. This rate is going to rise gradually during the upcoming years eventually reaching 12% in 2019. It is crucial for the company to pay the Superannuation tax for its employees in time; otherwise, a Superannuation Guarantee Charge (consists of the tax shortage and additional administrative charge) will be imposed. Overpaying the tax is also subject to penalties.

Luxury Car Tax

If you decide to buy a car valued over 60k USD (or 75k USD depending on the engine capacity) in Australia, beware paying the Luxury Car Tax which is 33%. It is imposed on all luxury cars (there are certain rules that describe what they are) being sold or imported down under.

Trade Taxes

  • Transfer pricing is applied in international trade for related parties (companies of one group) that handle the cross-border selling of goods and services. In this case, selling is conducted not at the market price (like it would be in the case with an arm’s length transaction), but at the “transfer pricing” (a lower intra-group price). This allows distributing the income in the favour of those parties that have lower taxes in their countries.
  • Customs Duty imposed on goods imported to Australia is approximately 5% (not a fixed rate, but depends on the kind of a good). It is calculated from the goods’ customs value which is defined depending on the country of origin, the purpose of import and the type of a product. Due to the complexity of rules concerning the Customs Duty, for importers, it is crucial to ask for advice in every particular case.
  • Excise Duty is the tax Australian manufacturers (or distributors) of tobacco, alcohol, and petrol pay. If the mentioned products are imported rather than produced inside the country, the Customs Duty equal to the relevant local excise is imposed. Although the excise rate is flat, it isn’t fixed and can increase during a year due to inflation changes on the market.

Territory Taxes

Transactions that happen within a certain state or states of Australia are usually subject to local taxes which don’t have a fixed cross-country legislation and vary from state to state. Each state/territory develops its own tax regulations and sets tax rates. Such assets as real estate and vehicles are usually subject to territory taxation.

Stamp Duty

All transactions concerning shares and real estate (such as transferring shares, lease agreements, mortgages etc.) are subject to the Stamp Duty. The tax is paid by the acquirer, not the supplier. The rate of this tax varies: in some states it is fixed, in other depends on the transaction’s value. For example, in South Wales, the rate can range from 1.25% for the cheapest properties to 7% for the most costly. In some cases, exemptions and reductions can apply.

Land Tax

If you own land whose value exceeds the prescribed one (for the specific state), you are subject to the annual land tax that covers all parcels of taxable land you own. In some states, you are tax exempt if your land is your only place of residence or if it is used for farming, schooling, charity, or religious purposes. The rate would be unique for each state and depend on the land’s threshold value. For example, in Victoria, it is 250k AUD (the rate is up to 2.25%), and in South Wales, it is 400k AUD (the rate is up to 2%).

Vehicle Duty

The tax is paid by the buyer/owner of the vehicle if

  • the car is new and being registered for the first time or
  • the car owner wants to re-register the car for another individual or
  • the car isn’t new and gets its first registration in a particular state.

The duty rate depends on the vehicle’s value (full price of a new car or a sale/market price of a second-hand car) and varies from state to state. In South Wales, it is 3% for the car valued 44.999k AUD and cheaper. For more expensive cars, the duty is 1.35k AUD plus additional 5%.

Payroll Tax

Employers whose employees are paid annual wages/salary exceeding the set threshold for this state/territory are subject to the Payroll Tax. The thresholds and rates depend on the state where the employer is located. For example, for Victoria, the threshold is 550k AUD and the rate is 4.9%.

Filing Your Taxes

Foreigners who work in Australia for a long time or those who get one of the permanent visas become the country’s tax residents and must file their taxable income annually. Being a tax resident has a drawback as you have to declare every kind of your income wherever you have earned it. The benefits are that you can enjoy your 18.2k AUD a year tax-free, claim tax offsets and get your income taxed at much lower rates than non-residents do in Australia.

Every employed individual in Australia must get the tax file number. Filing of tax returns must be completed after ending of the financial year (June, 30). If you need a professional help with lodging your tax returns, you can involve assistance of registered tax agents. Commonly, if your employer has been submitting your instalments throughout the financial year according to the Pay-as-you-go withholding scheme and you haven’t had other kinds of income except your wages, you must only submit your notice of assessment as your tax is already paid. Remember that the tax assessment notice must honestly declare all kinds of your income. Afterwards, the ATO will check whether your assessment was correct and whether refunds are needed.

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