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Paying Tax in Australia

PAYING TAX

This fact sheet is general information only.

What is income?

The law about income tax is contained in the Commonwealth Income Tax Assessment Act. Under the Constitution income tax can only be levied by the Commonwealth.

"Income" is not defined in the Act, partly because it is a term that encompasses so many different concepts. In general it will be characterized by:

  • a recurrent payment e.g. wages;
  • the ability to be convertible to cash;
  • a result of some activity undertaken by the taxpayer.

Assessable income & deductions

Assessable income is the income on which tax can be levied.

You are permitted to subtract allowable deductions from this amount. In general these deductions are the money you spend in order to earn the assessable income in the first place.

Taxable income

When you have subtracted the allowable deductions from the assessable income you are left with your taxable income.

The Australian taxation system operates on the principle that the more you earn, the more you pay in tax. This is only a principle, of course, because there are many people who pay a lower proportion of tax on their gross income than others. Often this is because of the level of deductions available to them or the source of their income.

Rebates

This is a reduction of your tax liability.

It is not the same as a tax deduction. The latter is an expense that is subtracted from your assessable income to arrive at taxable income; a rebate, on the other hand, is deducted after tax has been calculated.

For example, it is possible to obtain a rebate if the taxpayer has dependents they financially support or pay medical expenses over a specified sum (not including refunds from health funds and Medicare).

Leave & other employment entitlements

Tax can be levied at a different rate on leave & other employment entitlements This is an area where it is certainly worthwhile to obtain professional advice.

These issues concern payments such as:

  • the amount of tax that is payable when you complete work with unused leave payments;
  • the amount of tax that is payable when you complete work with unused long service leave;
  • payments made to employees on terminating their employment;
  • lump sum payments from superannuation schemes.

Social security benefits

There are some social security payments that are considered assessable income. Some include:

  • age pension;
  • sickness allowance;
  • some parenting payments;
  • some carer payments;
  • some veterans payments.

Exempt income

Examples of income that is tax exempt include:

  • maintenance payments to a former spouse;
  • most gifts under a will;
  • some personal injury awards;
  • gambling wins unless the taxpayer is a professional gambler;
  • profit from sale of assets acquired before 19 September 1985 (as long as it is not part of an enterprise);
  • some workers compensation payments.

Medicare levy

This is a separate levy imposed on taxpayers to pay for the public health system. Unlike some other taxes, it is a flat tax imposed on the taxpayer's total taxable income. In certain circumstances, especially for low income earners, there are exemptions from payment of the levy. Check the Tax Pack or speak to your tax agent.

There is also an additional surcharge applied to taxpayers who are not members of a private health scheme and whose income exceeds a certain sum, depending on whether the taxpayer has a family. Conversely a rebate for the cost of health insurance is available for individuals and families on lower incomes. Consult the Tax Pack for details.

HECS

The Higher Education Contribution Scheme is a fee pay-back scheme for full-time and part-time tertiary students. Students who pay the fees in advance will receive a discount; those that defer the payment (effectively a loan) pay through the taxation system. A percentage of taxable income is annually applied to pay the debt.

Payment by instalments

It is possible to get an extension to pay tax, but you will have to convince the ATO that there are legitimate reasons for it to be granted.

It is also possible to apply to make a tax payment by instalments. Make sure you make the application before the tax is due

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