Personal Income Tax 101
Understanding the Basics: Personal Income Tax
Australian residents pay personal income tax on all forms of income after a tax-free threshold of $18,200. The tax office calculate tax at four different rates according to how much income you earn each year, and the tax rate increases the more you make. The highest tax bracket applies to those with a taxable income of more than $180,001.
ATO taxes foreign residents, children, and working holidaymakers differently.
Income tax is the most significant type of tax the ATO collects, making up around half of all taxes they receive.
Types of Taxable Income
The ATO calculates tax on various forms of income, including employment, government support, investment, and business income.
- Employment income includes; wages, salary, allowances, bonus payments, termination payments, some lump sum payments, fringe benefits, and superannuation contributions.
- Government support includes all pension payments, allowances, carer support, and COVID-19 support payments. Some government support, such as disaster recovery payments, are tax exempt.
- Investment income includes interest paid by financial institutions, share dividends, rent from investment properties, managed investment trusts, and capital gains from profit on selling assets. This also includes cryptocurrency gains.
- Business income for sole traders is assessed as personal income, while business income for other entities such as companies is taxed separately to the individuals running the business entity.
Annual Tax Return
You have to declare all types of income, Australian and foreign. Any income received in foreign currency needs to be converted to Australian dollar value.
Most people need to lodge a tax return with the Australian Taxation Office each year by 31 October. If you have a tax agent lodging on your behalf, you’ll get an extension.
Your employer withholds tax from your wages or salary each pay period and pays the ATO on your behalf. If you’ve earned more money from other sources, such as investments or a side hustle, you might end up with a tax bill in addition to what has been withheld from your pay. When we calculate your taxable income, we’ll let you know in plenty of time if you have to pay more.
Make the Most of Allowable Deductions
Allowable deductions vary significantly according to the type of income you have earned. You can’t claim private expenses or anything that an employer has reimbursed.
Common deductions include home office, tools and equipment, accounting fees, donations, personal super contributions, and vehicle expenses. However, it’s best to check with us as you may be able to claim other expenses such as education, cleaning, or professional memberships.
When preparing your tax return, we will include any allowable offsets, rebates, or concessions that may apply to your situation to reduce your tax bill. We’ll also check that you’ve included all allowable deductions for your situation.
Click here to make an appointment with one of our tax accountants.
For more on our ‘Understanding the Basics’ series, see:
Understanding the Basics: Capital Gains Tax
Understanding the Basics: Tax on Superannuation