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Australian Personal Income Tax Review - AFC Online

This Review looks at current Personal Income Tax in Australia. We take into account what the current rates are, we look at Family Tax Benefits part A & B and further provide you with general information on Income Tax.

As a Professional Finance Broker it is important that you have a broad understanding of Income Tax in Australia as it will assist you when it comes to determining the maximum borrowing capacity for your clients. To assist your clients with a home loan, mortgage or Commercial loan, some understanding of the tax system is important.

We always recommend that appropriate tax advise is given by a tax accountant as there is a lot involved when it comes to Income Tax and what can be claimed.

Income Tax in Australia is the most important revenue stream within the Australian taxation system. Income tax is levied upon three sources of income for individual taxpayers: personal earnings (such as salary and wages), business income and capital gains.

Collectively these three sources of income tax account for 66% of federal government revenue and 57% of total revenue across the three tiers of government. Income received by individuals is taxed at progressive rates, while income derived by companies is taxed at a flat rate of 30%. Generally, capital gains are only subject to tax at the time the gain is realised.

Income tax is collected by the Australian Taxation Office for the Government of Australia. In Australia the financial year runs from July 1st to June 30th of the following year. Income tax is applied to the taxable income of a taxable entity. Taxable income is calculated, in a broad sense, by applying allowable deductions against the income of a taxable entity.

Personal Income Tax

Income tax on personal income is a progressive tax. The current tax-free threshold is $6,000, and the highest marginal rate for individuals is 45% In addition, most Australians are liable to pay the Medicare levy, of which the standard is 1.5% of taxable income.

As with many other countries, income tax is withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit Tax File Number (TFN) must be quoted to employers for employees to have withholdings calculated using the various tax brackets. In the absence of this number, employers are required to withhold tax at the rate of 46.5% (the highest marginal rate plus Medicare levy).

Individual income tax rates

Low Income Tax Offset

The Low Income Tax Offset (LITO) is a tax rebate for individuals on lower incomes. From 1 July 2009 it provides individuals earning less than $30,000 with a tax rebate of $1,350. The full offset is reduced by 4c for every dollar of taxable income above $30,000, meaning incomes greater than $63,750 do not receive any benefit. The Low Income Tax Offset creates an effective tax-free threshold of $15,000 for low income earners.

Income tax for Minors

Individuals under 18 years of age are taxed differently than adults.

Family Tax Benefit

For families with dependent children the income tax system includes a supplementary set of rules known as Family Tax Benefits (FTB) that are applied in a more complex way by different departments. The benefits and thresholds vary depending on the number of children, and which of the married partners earns the additional income.

There are two parts, FTB-A and FTB-B.

These payments are reduced by 20% for total family income over $42,559. It plateaus at roughly $1,300 per child until income over $94,000 is reached, at which point it is reduced by 30%.

FTB-B

FTB-B pays about $3,358 if the youngest child is under 5, $2,339 if 5..15. Only one payment for the youngest child is made. The payment is means tested on the income of the parent with the lower income, reducing by 20% for income over $4,526. It essentially encourages mothers to stay home.

Income is calculated more strictly for FTB purposes. For example, investment losses are considered to be income for the purpose of FTB, and salary sacrifice superannuation contributions are also counted as income.

There are other benefits related to this, for example the 2009 stimulus package included payments to those who received FTB-B.

The full system is more complex, and some information can be found on the websites of the Australian Tax Office, Centerlink, and the Family Assistance Office.

Contrary to the FTB's name, as from 1 July 2009 it will not be possible to claim FTB payments through the taxation system. All payments will be handled by Centrelink.

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