What Are the Australia Income Tax Rates and Brackets?
Living overseas doesn’t exempt you from paying taxes in Australia. If you’re not cautious, you might end up paying income tax in both countries. It’s equally significant to comprehend the Australian income tax system as it is to choose your place of residence.
This guide will help address all your Australian income tax rate questions, including:
- Determining your personal tax rate
- Ascertaining if you’re an Australian tax resident
- Paying capital gains tax
- Decreasing tax obligations
- Submitting a tax return
Understanding the Australian income tax system
The tax system in Australia is relatively straightforward. It involves paying income tax on three primary sources of income, which includes:
- Personal earnings from employment or investments
- Business earnings through corporate income taxes on profits
- Capital gains on the sale of assets like property
Australia uses a marginal tax rate system, meaning tax rates vary based on the tax bracket or threshold you fall into. The tax percentages that you pay depend on your corresponding income bracket.
Different marginal tax rates apply to Australian residents and foreign residents. As an Australian tax resident, you must pay income tax on all your earnings, regardless of their source.
How is an Australian income tax calculated?
To calculate your income tax, you must add your assessable income, including your worldwide income. There is an exception for non-residents, in which case you only need to declare your Australian income.
For instance, if you earn $80,000 from employment, $30,000 from rental property, and $10,000 in capital gains from selling shares, your total assessable income is $120,000. Before applying income tax rates, you must deduct any allowable expenses related to your income.
We’ll explain what allowable deductions are later, but let’s assume you have $15,000 in deductible expenses. This means your total taxable income is $105,000, placing you in the fourth tax bracket, with a total tax payment of $24,592.
To compute your taxable income, use this formula:
- Add all your income
- Subtract allowable deductions
- Apply applicable tax rates
- Subtract tax offsets
- Add Medicare Levy (if applicable)
Please keep in mind that the government’s tax calculator does not include the Medicare Levy.
Personal income tax rates and brackets
The table below outlines the tax brackets and rates applicable to Australian permanent residents for income tax purposes.
Income Thresholds | Tax Rate | Tax Payable for this income Bracket |
$0 – $18,200 | 0% | No tax payable |
$18,201 – $45,000 | 19% | 19c for each $1 over $18,200 |
$45,001 – $120,000 | 32.5% | $5,092 plus 32.5c for each $1 over $45,000 |
$120,001 – $180,000 | 37% | $29,467 plus 37c for each $1 over $120,000 |
$180,001 and over | 45% | $51,667 plus 45c for each $1 over $180,000 |
Your total income determines your tax bracket after subtracting the allowable deductions. In addition to this amount, you need to pay a 2% Medicare Levy. If you earn over $90,001, you may also have to pay an additional Medicare Levy Surcharge unless you have private health insurance.
Please bear in mind that the Australian Taxation Office (ATO) may change tax rates for each financial year.
Income Tax Rates & Brackets for Non Resident
If you’re not an Australian tax resident, you’ll have to pay higher income taxes. This has a more significant impact on low-income earners.
As shown in the table below, foreign residents earning over $45,000 must pay the same tax rate as Australian residents. However, they do not have the benefit of the tax-free threshold.
Conversely, a foreign resident earning only $30,000 annually in Australia must pay 32% on taxes. In comparison, an Australian resident with the same earnings would only have to pay 19% on $11,200.
If you live overseas and still qualify as an Australian tax resident, you must pay income tax on your foreign income as well. It’s advisable to seek professional financial advice to minimise your tax liability.
Income Thresholds | Tax Rate | Tax Payable for this income Bracket |
0 – $120,000 | 32.5% | 32.5c for each $1 |
$120,001 – $180,000 | 37% | $39,000 plus 37c for each $1 over $120,000 |
$180,001 and over | 45% | $61,200 plus 45c for each $1 over $180,000 |
How do you know if you are an Australian resident for tax purposes?
To be considered an Australian tax resident, it’s important to note that this is not the same as being an Australian citizen or permanent resident. Even if you were born in Australia, if you move overseas and cut all financial ties with Australia, you are classified as a non-resident for tax purposes. However, if you’re not an Australian citizen or permanent resident but earn money in Australia, you’re still considered a tax resident.
As a tax resident, you need to pay tax on all your worldwide income. This could result in double taxation if you also pay taxes in another country.
On the other hand, non-residents only pay taxes on their earnings within Australia.
The ATO provides four tests to determine your tax residency. Passing any of these tests would classify you as an Australian tax resident. These tests include:
- Having always lived in Australia and continuing to do so
- Living and working in Australia for more than six months
- Studying as an international student for more than six months
- Having strong ties to Australia
Suppose you’re an Australian expat who moves away with no intention of returning. In that case, you would need to prove to the ATO that you are no longer a tax resident.
What is the Australian tax rates for temporary residents?
To clarify, temporary residents in Australia are foreign nationals who reside there for a specific period without becoming full citizens. This includes expats who are currently living in Australia.
Temporary residents are subject to the same rules when determining their tax residency status. Suppose they live and work in Australia for more than six months in the same location. In that case, they will be classified as Australian tax residents.
However, if they travel through Australia for more than six months and work multiple jobs, they may be subject to working holiday maker tax rates and will not be considered tax residents. In this case, they would not be required to pay income tax on their foreign earnings.
How does capital gains tax fit into your tax payments?
Calculating your taxable income involves adding capital gains to your overall earnings. Capital gains occur when you sell assets such as shares or property. They are typically one-time payments that can push taxpayers into higher income tax brackets.
Capital gains tax, despite its name, is not a separate tax. When you file your tax return, you must report all your income, including capital gains, even if you have already paid payroll taxes on your employment income. The ATO will calculate the income tax that your employer has already paid and deduct it from the capital gains tax that you owe.
It is essential to deduct any expenses related to capital gains. For instance, if you sold a property for $800,000 but bought it five years ago for $600,000, your capital gain would be only $200,000.
What about the Medicare Levy in Australia?
Foreign residents are not obligated to pay the Medicare Levy since it would be impractical to contribute to a medical service they cannot utilise outside the country. Conversely, all Australian tax residents must pay a 2% Medicare Levy in addition to their income tax.
Individuals with high incomes may also be subjected to a Medicare Levy Surcharge. They can only avoid it if they have private health insurance or private patient hospital coverage. The surcharge has four tiers based on income thresholds—the surcharge rate increases with higher income levels.
|
Medicare Levy Surcharge Tier |
Income Thresholds for Individuals |
Individual Thresholds for Households |
Rate of surcharge |
|
Tier 0 |
Up to $90,000 |
Up to $180,000 |
0% |
|
Tier 1 |
$90,001 – $105,000 |
$180,001 – $210,000 |
1% |
|
Tier 2 |
$105,001 – $140,000 |
$210,001 – $280,000 |
1.25% |
|
Tier 3 |
$140,001 and over |
$280,001 and over |
1.5% |
How To Reduce Taxable Income Australia?
There are several steps you can take to minimise your tax payments.
- Firstly, keeping meticulous records of all your expenses and maintaining evidence like receipts and property maintenance bills is crucial. This will aid in accurately preparing and lodging your tax return and provide proof of your expenses if requested by the ATO.
- Secondly, if you own an investment property, consider the advantages of negative gearing, which involves losing property income to lower taxable income. This tactic is open to both Australian residents and non-residents.
- Thirdly, determine if you qualify for any tax offsets that can reduce your tax liability. Please note that most foreign residents are ineligible for tax offsets.
- Finally, consulting a financial advisor about your tax situation can help identify additional strategies to minimise your tax payments.
What deductions are allowed on taxable income?
Numerous individuals are still determining which expenses they can deduct for tax purposes. The rule of thumb is that only expenses linked to earning an income, not personal expenditures, can be removed.
You can claim only a portion of an expense if it has personal and business uses. For instance, if you rent out a room in your residence, you can only claim deductions for the portion of the property that is rented out to occupants.
Work-related expenses
In order to pay income tax on your salary, you must be employed or earn an income in Australia. Your employer typically withholds your income tax before paying you unless you’re self-employed.
However, if you receive any other sources of income, such as from shares, investment properties, or selling an asset, you need to file a tax return. Even if you don’t have any additional sources of income, it’s still a good idea to submit a tax return to claim any tax deductions you’re entitled to, which could lead to a tax refund from the ATO.
It’s essential to note that you can only deduct expenses that your employer has not already reimbursed.
Work-related deductions that you may qualify for include expenses associated with:
- Travel
- Company motor vehicles
- Self-education
- Working from home
- Tools and equipment
- Clothing, laundry and dry-cleaning
- Union fees and subscriptions to an association
However, these expenses need to be directly connected to earning an income.
Investment income deductions
To fulfil your tax obligations for personal investments, you are required to file a tax return. The deductions that you can claim for your investments, whether it’s in property or dividends, are as follows:
- Account-keeping fees
- Ongoing fees for property management
- Payment for investment advice (for dividends and shares only)
- Interest and borrowing expenses related to your home loan
- Advertising costs for tenants
- Council rates
- Land tax
- Strata fees
- Depreciation
- Repairs and pest control
- Insurance
- Legal expenses
It is important to note that for property investments, the property must be rented out or genuinely available for rent. If the ATO determines that you did not make a reasonable effort to rent out your property, you will not be allowed to claim expenses for an empty property.
What are tax offsets?
Tax offsets differ from deductions as they directly reduce the amount of tax you owe instead of lowering your taxable income. However, most tax offsets are only accessible to Australian residents.
The ATO will automatically apply tax offsets, so you don’t need to manually indicate them on your tax return.
Low Income Tax Offset
If your income falls within the range of $37,001 to $126,000, you may qualify for the Low and Middle Income Tax Offset (LMITO).
In 2022-23, the federal budget announced an increase of $420 for the 2021-22 income year. This increases the base values to $675 and the full amount to $1,500, in addition to the LITO.
- Individuals earning $37,000 or less will receive an offset of $255.
- If your income falls between $37,001 and $48,000, your offset will be $255 plus 7.5 cents for each dollar over $37,000, up to a maximum of $1,080.
- Those who earn between $48,001 and $90,000 will receive an offset of $1,080.
- For earnings between $90,001 and $126,000, the offset is $1,080, reduced by 3 cents for every dollar over $90,000.
Using the example given earlier, you would receive a LITO of $700 and an LMITO of $675.
Please keep in mind that the LMITO amount for 2018-19, 2019-20, and 2020-21 fiscal years will remain the same, i.e. between $255 and $1,080.
Low and Middle Income Tax Offset
If you earn between $37,001 and $126,000, you will get the low and middle-income tax offset of between $255 and $1,080. This is on top of the low-income tax offset.
- Earning $37,000 or less, you get an offset of $255
- Earning between $37,001 to $48,000, you get an offset of $255 plus 7.5 cents for every $1 above $37,000, to a maximum $1,080
- Earning between $48,001 to $90,000, you get an offset of $1,080
- Earning between $90,001 to $126,000, you get $1,080 minus 3 cents for every $1 above $90,000
Using our previous example, you will get an offset of $255 and a low-income tax offset of $700.
Seniors and Pensioners Tax Offset
The Seniors and Pensioners Tax Offset (SAPTO) is a benefit available to senior Australians. To be eligible for the offset, individual taxpayers must earn less than $50,119, while couples’ combined income must be below $83,580. The maximum offset for an individual is $2,230, and for a couple, it is $3,204.
To qualify for the SAPTO, you must have reached the Age Pension age, which is currently 66 years and six months. From July 1st, 2023, the Age Pension age will increase to 67.
Claiming a Foreign Income Tax Offset
If you’re a temporary resident in Australia or an expat living abroad, you may have paid income tax in Australia and a foreign country, resulting in double taxation. To ease this burden, you may be eligible for a tax offset. This applies, for instance, if you pay income tax in Australia and your country of residence.
However, in order to claim this offset, you need to meet certain requirements, such as providing evidence of foreign income tax payments and reporting the relevant income or capital gain in your Australian tax return.
It’s important to note that you can only claim the offset after paying both taxes.
Can I get a tax refund in Australia?
When you file your tax return, the ATO will calculate the amount of tax you owe. You don’t need further action if you don’t owe any tax.
However, sometimes, you may be entitled to a tax refund, which the ATO will automatically issue to you. This is particularly significant for non-Australian citizens who have only worked in Australia temporarily. Even if you are required to file a tax return, you may not owe any tax to the government.
In such cases, you may be eligible for a tax refund due to reasons such as:
- Superannuation payments for non-residents
- Working holiday tax rebates
- International student tax rebates
- Qualifying for a tax offset
Lodging a tax return: step by step
You must still complete a tax return if you are an overseas Australian tax resident. The process is simple, and you must submit your tax return between July 1st and October 31st of the following year.
To get started:
- You’ll need to create a myGov account if you haven’t already.
- Next, update your account settings to allow you to sign in from overseas.
- Make sure you have an Australian bank account for refunds.
- Include all assessable income and deductions.
- Indicate whether you are a tax resident or non-resident. You must still declare if you were only a tax resident for part of the year.
- You can submit your tax return online to ATO.
However, if you do not prefer the online system, you can use a registered tax agent or a paper tax return. You can also ask someone you trust to lodge it on your behalf, in which case, you’ll need to grant power of attorney.
Case study: an Australian expat living in Singapore
Ben, who has been living in Singapore for ten years, still owns a property in Australia and is required to lodge a tax return for his Australian income. However, he is not considered an Australian tax resident. He is not obligated to pay personal income tax on his earnings in Singapore. Unfortunately, he is also ineligible for any tax offsets. Ben must report his Australian property earnings in his tax return.
Ben’s rental property generates $570 per week, but he incurs expenses of $100 per week for property maintenance and other fees. Additionally, he pays $400 a month on home loan interest repayments. Ben’s tax return shows $29,640 in net income and $26,000 in deductions, resulting in a taxable income of $3,640.
Since Ben is a foreign investor, he cannot claim the tax-free threshold or the low-income tax offset. As a result, he must pay $1,183 in taxes.
If Ben were still an Australian tax resident, would he pay less in total tax?
Suppose Ben earned AU$ 170,000 in Singapore. In that case, his total taxable income would be $199,640, which includes $26,000 in Australian deductions and $5,000 in work-related deductions from Singapore. The ATO would tax Ben on $168,640, and he would pay $47,463.80 in tax based on resident tax rates.
Although Ben would fall into a lower tax bracket, he would still pay considerably more in taxes. Additionally, Australian tax rates are higher than Singapore’s, where he only pays 18% instead of 37.5% on the same income. Ben could claim a Foreign Income Tax Offset if he pays double taxes.
Australian tax rates and brackets in a nutshell
The tax rates in Australia are considered one of the highest globally, especially for expats earning an income there. As an expat, it’s generally advisable to end your tax residency in Australia to avoid paying taxes twice.
Tax offsets are available to lessen the tax liability, but usually only for tax residents. It is crucial to comprehend your tax obligations if you are moving or residing overseas.
It is better to speak with a tax professional to determine your tax bracket and maximise your chances of qualifying for a tax offset or deduction.
Frequently asked questions
What are the tax brackets in Australia and how do I figure out which one I belong to?
A tax bracket is a range of income levels that determines the rate at which a taxpayer is taxed.
The income tax brackets in Australia have a starting point of $18,201 for Australian tax residents.
The ATO is responsible for determining which tax bracket you fall under based on the information in your tax return. As your income increases and reaches each threshold, you will be required to pay a higher percentage of tax on the portion of your earnings that exceed that threshold.
How do I calculate taxable income?
Calculate your taxable income by adding all your assessable income, such as rental property profits, salary, dividends, and subtracting any income-related expenses.
What is the expat tax rate?
If you’re a non-tax resident in Australia, you must pay a 32% tax on income below $120,000. If you earn between $120,001 and $180,000, you must pay 37%. And finally, if you earn above $180,000, foreign residents must pay 45% of their taxable income.
What is the minimum salary to pay income tax in Australia as an expat?
Australia’s marginal tax rate system is progressive and includes a tax-free threshold of $18,201 for all income earned in Australia. Income above this threshold is taxed at different rates, such as 19% for income up to $45,000 and 32.5% for income between $45,000 and $120,000.
However, foreign residents do not receive the tax-free threshold and are required to pay a flat rate of 32% on all income earned in Australia up to $120,000. After that, the marginal tax rate increases at the same rate as it does for Australian residents.
How much tax do I pay on $60,000 in Australia?
Simply put, if you are an Australian tax resident, your tax liability on a $60,000 income would be $9,967. However, if you are a non-resident (an Australian living abroad), you would be required to pay $19,500 in taxes.
It is crucial to keep in mind that you can lower your taxable income by deducting any expenses related to your income.
Is Australia a highly taxed country?
Australia’s marginal tax rate system is progressive, meaning that as income increases, the percentage of tax paid also increases. However, compared to other countries, the marginal tax rate system protects low-income earners in Australia from paying higher taxes that they may not be able to afford.
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