Beginners Guide to Income Tax

Income tax is an unavoidable part of earning money in Australia, and for most people, filing a tax return has become a routine annual task.  Perhaps you’ve just landed your first job, recently finished school or university, or you’ve migrated to Australia—it’s understandable that you may not yet fully grasp how income tax works. Don’t worry, though! We’ve created this simple guide to help you navigate Australia’s tax system.

What is Income Tax?

Income tax is a levy paid on all forms of income, including wages from your job, profits from your business, and returns from investments like bank interest or dividends. You may also need to pay tax if you sell or give away valuable assets, such as a house or shares.

Tax-Free Threshold

In Australia, you can earn up to $18,200 each year without paying income tax—this is known as the tax-free threshold. If your income exceeds this amount, however, you will likely have to pay tax on the additional income.

Australia’s Progressive Tax System

Australia uses a progressive tax system, meaning the higher your income, the higher your tax rate. Here’s an overview of the current tax rates for the 2024-25 financial year:

• Tax-free threshold: $18,200
• Lowest tax rate: 16%, applied to every dollar earned over the tax-free threshold.
• Highest tax rate: 45%, applied to income over $190,000.

It’s worth noting that from 2013 until the 2024 tax year, the lowest tax rate was 19%, and the highest rate of 45% applied to income over $180,000. Most taxpayers fall somewhere between these two extremes.  Australian resident tax rates are available on the Australian Taxation Office (ATO) website.

Medicare Levy and Surcharge

In addition to income tax, most people will need to pay a Medicare Levy, which is 2% of your taxable income. This levy helps fund Australia’s healthcare system. High-income earners who don’t have private hospital cover may also be required to pay the Medicare Levy Surcharge.

Key Takeaways

• The tax-free threshold is $18,200, meaning you don’t pay tax on income up to this amount.
• Australia’s progressive tax system means that your tax rate increases as your income rises.
• The current lowest tax rate is 16%, while the highest is 45% for income over $190,000.
• Don’t forget about the Medicare Levy, which is 2% for most people, or the Medicare Levy Surcharge if applicable.

Types of Taxable Income

Income in Australia can be earned in various ways, all of which are taxable. These include:

• Employment income: Salary, wages, allowances, bonuses, tips, fringe benefits, lump sum payments, and superannuation contributions.
• Government payments: Benefits from Centrelink, such as the age pension, Austudy, Jobseeker, youth allowance, carer payments, and parenting payments.
• Investment income: Income from bank interest, dividends, and other returns on investments.
• Business income: Profits generated by running a business.

How do I Pay Income Tax?

• For most people with an employer, income tax is automatically deducted from your wages or salary and paid directly to the ATO. The amount you receive in your bank account is your after-tax
• However, for other forms of income—such as business profits, rental income, or bank interest—you are responsible for reporting and paying tax yourself.

Filing Your Tax Return

Each year, most Australians are required to complete an income tax return, where they report all the income they’ve earned over the financial year (from 1 July to 30 June). The tax return allows you to calculate your total tax liability.

• Refunds: If too much tax has been deducted from your pay throughout the year, you may receive a refund.
• Additional payments: If you’ve earned additional income (such as business profits or investment returns) or if not enough tax was withheld from your paycheck, you may owe additional tax to the ATO.

Who Has to Lodge a Tax Return?

You must lodge a tax return if:

• You earned more than the $18,200 tax-free threshold during the income year.
• You run a business or profession, regardless of whether it made a profit or a loss.
• You earned less than $18,200, but your employer withheld tax from your pay.

If you’re filing for the first time, it’s a good idea to review the ATO’s guidelines or seek help from a tax professional.

When is the Deadline for Lodging a Tax Return?

Tax returns must be lodged as soon as possible after 30 June and no later than 31 October each year. If our office lodges your tax return then you might get an extension, provided you’re registered with our tax agent before the October 31 deadline.

What About Deductions?

One of the key advantages of filing a tax return is the ability to claim deductions for eligible expenses incurred during the year. These deductions reduce your taxable income, which may increase your chances of receiving a refund.

Common deductible expenses include:

• Vehicle and travel expenses: If you use your vehicle for work-related purposes.
• Clothing and laundry: Costs for work uniforms or protective clothing.
• Home office expenses: For those who work from home, including utilities and office supplies.
• Protective equipment: Safety gear such as hard hats, gloves, and face masks.
• Rapid Antigen Tests (RATs): If required for work.
• Self-education expenses: For courses or training that relate directly to your current employment.
• Tools and equipment: Costs for tools or assets used in your job.
• Gifts and donations: To eligible charities.
• Managing tax affairs: Fees paid to a tax agent.
• Investment deductions: Interest and fees associated with managing investment income.
• Personal superannuation contributions: Contributions you made to your super fund (outside employer contributions).

Always keep receipts and proper documentation for your deductions to support your claims. You can only claim expenses directly related to your job and not personal or reimbursed costs. If you’re unsure, check with your tax agent to ensure you’re claiming eligible deductions.

By understanding these basic principles, you’ll be well on your way to navigating Australia’s income tax system. If you need more guidance, contact our office on (03)9848 5933 or book a complimentary inital consultation.

Source: www.ato.gov.au