Income tax is a part of life that you cannot escape from, which is why it is crucial to understand. For people who have been earning for a couple of years, paying income tax is no less than a habit.
However, for someone who has just started earning, the tax system in Australia might be too complex. So, to help all the beginners, here is a guide to income tax in Australia.
What is income tax?
Income tax, just like its name suggests, is the tax an individual has to pay on his income. This tax is applicable to all forms of income, i.e., wages from the job, returns from investments like dividends and bank interest and profits from your business.
You must also pay tax if you sell valuable assets like shares or your house. But why do we pay tax in Australia? All the tax collected by the ATO funds community services (education, health care, etc.). Hence, one must pay it. Usually, people with multiple income sources hire tax accountants to make the whole process easier for themselves.
Tax-free threshold
In Australia, any individual who earns up to $18,200 annually does not have to pay any tax, which is called Tax-free Threshold. But as soon as you start earning more than this amount, you are liable to pay tax.
Australian tax system
In Australia, the higher you earn, the more tax you pay. In simpler terms, Australia has a progressive tax system. For every dollar earned above the tax-free threshold to $45,000, you must pay 19% tax, the lowest tax rate.
If your income is between $45,000 to $120,000, you will pay 32.5% tax for every dollar above $45,000, along with a fixed amount which is ($5,092). To learn more about the tax rates for higher incomes, go to the official website of the Australian Tax Office (ATO).
What are the types of taxable income?
You can earn income in various ways, which include:
- Employment income (This includes your salary and wages, the allowance you receive, tips and bonuses, fringe benefits, super contributions and lump sum payments.)
- Government payments and Centrelink
- Investment income (even the bank interest)
- Business income
How to pay income tax?
If an employer has hired you, the salary you get in your bank account is the amount after tax. In such a case, income tax will automatically be deducted from your salary or wage and then paid to the ATO directly. You don’t have to worry about taxes.
When it comes to other sources that are generating income, you are the only one responsible. This implies for the bank interests or business profits.
There is a document called income tax return that almost all taxpayers must complete each financial year. This document records every type of income you earn throughout the year and lets you work out your tax liability.
In most cases, one ends up paying a little too much tax and, thus, becomes eligible for a refund. For incomes aside from your job, you must pay taxes based on the liability calculated in the tax return.
For those who don’t want to be burdened with taxes, you should contact a good tax accountant, like Clear Tax Accountants, to handle tax-related responsibilities. At Clear Tax Accountants, we specialise in small business accounting, helping you with your accounting and taxation matters. So, if you want to enjoy our accounting services in Melbourne, Contact Clear Tax Accountants today.
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