How does tax work in Australia?
The main types of tax in Australia
As a business owner, you may have wondered, “How does tax work in Australia?” or “When do you have to pay tax in Australia?”
Well, first, let’s explore who pays taxes. In Australia, the ATO taxes residents on worldwide income and non-residents on the income they earn from Australian sources.
For companies, the ATO taxes businesses on their profits from Australian operations.
Here are the main types of tax that apply in Australia for businesses:
Taxable income is an entity’s total assessable income minus allowable deductions.
If you have a loss, don’t worry. You can carry it over to future years if you pass the loss carry forward tests.
Be sure to include the following items when calculating your business’ assessable income:
all gross income from everyday business activities
all revenue you earn outside of daily operations
Your assessable income includes:
capital gains and losses
cash prizes for your business
changes in the value of trading stock
commissions, compensation payments, gratuities and investment earnings
income generated through the sharing economy (an economic activity where people use a digital platform to share assets or services for a fee)
isolated transactions intended to make a profit
Income tax rates
Income tax rates for businesses and individuals depend on the taxable income amount. Australia uses a progressive tax system where people who earn more money pay a higher percentage of taxes.
You can deduct most business expenses to reduce your taxable income.
The ATO determines your taxable income with this equation:
Assessable income – deductions = taxable income
Deductible expenses include:
When claiming an expense, make sure:
the expense is for your business and not for private use.
it directly relates to earning your income.
If the item or service is also used for private purposes, you can only claim the percentage used for business purposes. You also need to have records to support your claim.
According to tax law, your records must include documentation of all transactions and be:
in English or a form the ATO can readily access and convert into English
in writing, either electronically or on paper
kept for five years (or longer for some records).
Companies in Australia are separate entities from their shareholders.
After applying residency and source rules, any income a company gets is taxable. A company based in Australia is subject to company tax, which the ATO sets.
For a company based overseas, the ATO taxes at the same rate as a domestic company for any income it earns from Australian sources.
Company tax rates: A company’s full tax rate is 30% of its taxable income. Base rate entities may be eligible for a lower company tax rate of 25%.
Payroll tax is a state-based tax levied on wages employers pay their employees.
Some businesses are exempt from paying payroll taxes.
So, when do you pay tax in Australia?
You pay taxes if your total Australian wages exceed the tax-free threshold for your relevant state or territory.
If the total amount of your Australian wages is more than the set threshold, you need to register for payroll tax. To find the threshold and payroll tax rate, visit the state or territory’s revenue office website.
Capital gains tax (CGT)
CGT is a levy on the earnings from asset sales.
If a foreign company has any assets in Australia that it uses for business purposes, then it may be subject to CGT on any capital gain it makes on the sale of the asset. All businesses must keep records of any assets that could be subject to CGT.
If you have a small business and meet specific requirements, you may be able to get a concession on capital gains tax.
Goods and services tax (GST)
In Australia, nearly all merchandise, services and other objects sold or consumed in Australia are subject to a 10% tax called GST.
Items that don’t have GST included are called GST-free sales.
Other taxes and levies
You may need to pay other taxes and levies depending on your situation.
Fringe benefits tax (FBT)
FBT is a tax employers pay on certain benefits they provide to their employees. Some examples of fringe benefits are:
permitting the use of a company car for personal errands
giving benefits under a salary sacrifice agreement with an employee
offering a discounted loan
paying for gym memberships
giving away free concert tickets
reimbursing expenses like school fees
Medicare levy and Medicare levy surcharge
The Medicare levy is a tax that helps fund Australia’s public health system.
Most Australian residents are required to pay the Medicare levy. The current Medicare levy rate is 2% of your taxable income, on top of the tax you pay on your taxable income.
If you, your spouse or your dependent children lack adequate private health insurance and you earn above a certain income, the ATO may require you to pay a Medicare levy surcharge. The rate is 1%, 1.25% or 1.5% based on the total of:
any amount on which you’ve paid family trust distribution tax
reportable fringe benefits
The ATO calculates whether you have to pay the Medicare levy surcharge, based on the information that you provide in your tax return. If you do, it’ll show on your notice of assessment as one amount, called Medicare levy and surcharge.
Superannuation guarantee charge (SGC)
The ATO requires every employer in Australia to pay their employees a minimum level of superannuation, helping to support their financial needs in retirement.
If you don’t pay an employee’s minimum superannuation guarantee on time and to the right fund, you may need to pay the super guarantee charge and submit an SGC statement to the ATO. The SGC is more than the superannuation you would have otherwise paid and is not tax-deductible.
Study and training loan repayment thresholds and rates
If you have a study and training loan, you must make repayments when your income exceeds a certain threshold.
The repayment thresholds and rates are updated annually for the repayment of:
ABSTUDY Student Start-up Loan (ABSTUDY SSL)
Higher Education Loan Program (HELP)
Student Financial Supplement Scheme (SFSS)
Student Start-up Loan (SSL)
Trade Support Loan (TSL)
VET Student Loan (VSL)
The ATO’s website has the specific thresholds and rates for 2022-23.
Now that you know more about how the tax system works in Australia it’s time to learn more about where your taxes go.
Where do taxes go?
In Australia, taxes fund many essential government services, including:
community facilities like parks and playgrounds
payments for disaster relief, pensions and welfare
roads and railways
Tax concessions for eligible businesses
There are several tax concessions available to eligible businesses in Australia.
Here are three of the most common:
Small business concessions: Small businesses that qualify can take advantage of various concessions, including payment and reporting options. This applies to companies, partnerships, sole traders and trusts.
Primary producer concessions: If you’re a primary producer, the amounts you include in your assessable income each year may be affected by special tax concessions. A primary producer is an individual, company, partnership or trust running a business specialising in fishing or pearling, plant or animal cultivation and tree farming or felling.
Special professionals, sportspersons and entertainers: Income averaging is a process that lets qualified individuals pay a lower tax rate during years when they make more money than usual. If you are an artist, author, composer, inventor, performing artist or sportsperson, you may be eligible for income averaging.
Paying taxes in Australia
If you’re wondering how to pay taxes in Australia, there are several ways to do it. Here are some of the most common:
Pay-as-you-go (PAYG) withholding
Under the PAYG withholding system, employers withhold tax from their employees’ salaries and wages and pay it to the ATO. This employer obligation helps payees to meet their end of year tax liabilities.
Under the PAYG instalments system, businesses make regular payments to the ATO based on their expected income tax liability. These payments are usually quarterly, so you can avoid a large tax bill come return time.
Lodge a tax return
All businesses must lodge a tax return each year.
Depending on the size and frequency of your business transactions, you may need to file business activity statements (BAS) more frequently. The way you lodge your tax also depends on your business structure.
After checking the BAS and tax return requirements for your business type, find out when you need to lodge.
When to lodge a return:
If you don’t go through a registered tax agent, the deadline for returns is 31 October for:
For companies filing their own taxes, the deadline is typically 28 February. If you use a registered tax agent to file your taxes, they’ll tell you when the return is due.
The deadlines for BAS submissions are quarterly or monthly, depending on the business.
How to lodge a return:
There are several ways to lodge your tax return:
myTax: This is the ATO’s online lodgment system. You can use myTax if you’re a sole trader.
paper: You can use a paper tax return to file your taxes by mail. Returns will typically process within 50 business days.
registered tax agent: Another option is to use a registered tax agent who is a qualified professional registered with the Tax Practitioners Board (TPB). You can use the services of a tax agent by communicating online or in person.
standard business reporting (SBR) enabled software: You can also use software for business reporting for your company, trust or partnership.
Lodging your business activity statements
All businesses in Australia must lodge BAS statements.
You can lodge:
by phone (for nil BAS statements only)
online through myGov or SBR-enabled software
through a registered BAS or tax agent.
We hope this guide helped answer the question, “How does tax work in Australia?” Now that you know the basics, you can start paying your taxes confidently.
How to lodge a business tax return
How long does it take to get a tax return?
Tax receipts: A simple guide for business owners