Income Tax in Australia

Income tax in Australia is imposed on three income sources with regard to individuals who pay taxes. They are capital gains; salaries and wages (fall in the category of personal earnings) and income from business. In the context of individuals, tax is imposed on the income at progressive rates. On the other hand, flat tax rate is imposed on income earned by companies. The flat rate is usually 30 percent. Income tax is levied on capital gains only when the gains are actualized.

Income tax in Australia is imposed on three income sources with regard to individuals who pay taxes. They are capital gains; salaries and wages (fall in the category of personal earnings) and income from business. In the context of individuals, tax is imposed on the income at progressive rates. On the other hand, flat tax rate is imposed on income earned by companies. The flat rate is usually 30 percent. Income tax is levied on capital gains only when the gains are actualized.

A brief history of income tax:

The concept of income tax was first introduced in Tasmania in the year 1880. The income tax that was imposed was in the form of withholding tax on the salaries given to the employees of the company. It was necessary to impose the tax because of a prevailing financial crisis in the state. For similar reasons, the practice of imposing income tax started in the southern part of Australia in the year 1884. In the year 1907, practically all the states in Australia had implemented income tax.

Personal income tax in Australia:

Personal income tax in Australia is progressive. 45 percent has been slated as the marginal rate in case of individuals. To carry out calculation of income tax in Australia, Tax File Number of 9 digits need to be provided to the employers, so that the withholdings of the employees can be calculated by making use of the tax brackets. In case this nine digit number is not provided, the employers withhold tax as per the marginal rate, which is the highest. The same applies to banks. The banks have the right to withhold tax (as per marginal rate) on the income earned from the interests, by the account holders if the account holders do not furnish the Tax File Number. With regard to the taxpayers, who own a business or work in corporates, the “Australian Business Number” is required to be provided to their respective banks. Not providing the tax file numbers or business numbers is not considered a crime but the disadvantage lies in the fact that the banks would withhold tax at marginal rates (highest).

Low Income Tax Offset or LITO:

LITO or low income tax offset is applied on income, which does not exceed USD$30,000. In the Budget of 2007-2008, it was raised and now ranges between USD$150 to USD$750. The low income tax offset gets nullified for an individual whose income is more than USD$30,000.

Company Tax:

Tax rates of companies are flat at 30 percent. Dividend imputation is a process wherein the corporate houses furnish details of the corporate tax paid by them to the government. So, by going through the Franking credits, an individual knows exactly how much tax the company has paid. However, through the system of Dividend Imputation, the residents of Australia are not required to shell out the company tax, which is levied on the profits earned from dividends. Corporate income tax paid by the Australian corporations, generate “franking credits”. These “ franking credits” are applicable to payments of dividends at 30% (maximum rate).

Capital Gains Tax:

Capital gains tax belongs to the family of Income tax in Australia. After applying concessions, we get the net capital gains. These are taxed at marginal rates. An entity, capable of owing assets are taxable under capital gains. Therefore, capital gains are applicable for companies and individuals. In the year 1999, indexing on capital gains stopped . Individuals who had disposed off their assets prior to 1985, September were excluded from capital gains tax or CGT.

Family Tax Benefit:

With regard to Income tax in Australia, for families and their dependent off springs, a separate set of norms are applied. These are referred to as Family Tax benefits or FBT. The tax incurred depends on the number of off springs.