It's the employer's responsibility to withhold taxes from employee's payments through payroll and pay them to the Australian Taxation Office (ATO). Payments to the ATO are referred to as Instalment Activity Statements. Employers are required to make payments to the ATO on specific dates depending on their Tax Remitter bracket.
Superannuation & retirement taxation
Superannuation is the arrangements put in place by the Government of Australia to encourage people to save up funds to provide them with an income stream when they retire. Employers must contribute a minimum of 9.5% of an employee's earnings base (capped earnings level of $55,270 per quarter) to a registered superannuation fund or retirement savings account (RSA) on behalf of the employee. Since superannuation funds or RSAas are not seen as a form of fringe benefit, employees pay 15% tax on the contribution that their employer makes. Employees may choose to make before-tax concessional contributions capped annually at $25,000.
The rate that employers need to contribute will increase to 10% in July 2021 and will continue to increase by 0.5% every year, reaching 12% by July 2025 when it will be capped.
Companies employing workers in Australia have to obtain a workers' compensation insurance.
Fringe benefits tax (FBT)
Australia is one of the few countries where the employer covers the tax for non-cash fringe benefits (company car, parking, free private health care, accommodation, low-interest loans). The FBT is levied at 47% of the taxable value multiplied by a gross-up factor of the fringe benefits granted to employees. Laptops and mobile phones used for work purposes are exempt from the fringe benefits tax.
Benefits subject to FBT are excluded from the employee's taxable income. Still, they may be taken into account as reportable fringe benefits when determining the employee's liability for tax surcharges such as the Medicare levy surcharge and income-related obligations such as child support, and entitlement to specific tax offsets.
Australian residents have to pay tax on their worldwide income. Individuals are considered Australian residents in the following circumstances:
- Individuals whose domicile is in Australia, unless they have a permanent place of abode outside Australia.
- Individuals who spend more than one-half of the income year (183 days) in Australia, unless the individual's usual residence is outside Australia and the individual does not intend to reside in Australia.
- Individuals who are members of specific government superannuation plans, or spouse of such individuals.
Temporary residents are exempt from Australian tax on foreign source income. A temporary resident is defined as someone who:
- Holds a temporary visa granted under the Migration Act 1958
- Is not an Australian resident within the meaning of the Social Security Act 1991
- Does not have an Australian spouse as defined in the Social Security Act 1991
Income tax in Australia differs depending on whether the employee is a resident of Australia or not. The following resident income tax rates do not include either Medicare Levy or Medicare Levy Surcharge.
Resident Income Tax 2020/2021
|Taxable Income (AUD)||Income Tax|
|$ 0 - 18,200||0|
|$ 18,201 - 45,000||19%|
|$ 45,001 - 120,00||32.5%|
|$ 120,001 - 180,000||37%|
|Over $ 180,000||45%|
Non-Resident Income Tax 2020/21
|Taxable Income (AUD)||Income Tax|
|$ 0 - 120,000||32.5%|
|$ 120,00 - 180,000||37%|
|Over $ 180,000||45%|
Non-residents are not required to pay the Medicare levy in Australia.
There is no joint filing for spouses in Australia.
Medicare is a universal health program that provides basic medical and hospital care free of charge. Most individual Australian resident taxpayers are subject to a 2% levy on their taxable income to fund Medicare and Disability Care. The Medicare levy low-income threshold is currently $22,398 for individuals.
An additional Medicare levy surcharge of up to 1.5% applies to higher income taxpayers who are not covered by a health insurance for private patient hospital cover.
While many of these concern the employee, it's important for you to understand since employers are responsible for filing taxes and accounting for various income offsets.
As long as employers do not reimburse expenses, residents and non-residents can deduct expenses incurred in employment. These could be business-connected travel expenses, vehicle expenses, subscriptions to professional or trade organisations, and protective clothing.
The following expenses cannot be claimed as a tax deduction:
Travel costs to and from the place of work
Private or domestic expenses
Prepaid expenses are deductible over the period to which the cost relates and are subject to exceptions.
Allowances that employees receive for living away from home are currently subject to Fringe Benefits Tax (FBT) that is payable by the employer. A portion of that allowance can be exempt from FBT when it covers accommodation or excess food costs. This concessional tax treatment for employees living outside of Australia is limited to 12 months.
Cars provided by employers are taxed concessionally under the FBT rules.
Certain relocation expenses are exempt from FBT. However, relocation costs are rarely covered by the employer and are instead an expense the employee needs to pay. They can be but deducted from the taxable income as salary sacrifice.
Employees can claim a tax deduction for the registered superannuation funds contributions they have made, regardless of the extent of their employment-related activities. However, suppose the contributions made in a year (including those made by an employer) exceed the annual 'concessional contributions cap' of $25,000. In that case, the tax employee pay on the excess matches the income tax bracket they usually fall under (instead of the 15%).
In case an employee does not reach the full $25,000 cap in a given year, and they have accumulated a total superannuation balance of less than $500,000 by the end of the previous financial year (June 30th), they can carry forward the unused amounts. The limit on the carryover is five years.
Charitable contributions over $2 are generally deductible when made to entities that are named as 'deductible gift recipients' in the tax law or endorsed by the Commissioner of Taxation. However, the deduction is limited to the amount of assessable income remaining after all other deductions have been applied.
Family tax benefits
A Family Tax Benefit is extended to individuals with dependent children or secondary school students under the age of 19 whose family income is below a certain threshold. Australian residents, individuals on a special category visa or ones with an approved visa for family tax benefit purposes are eligible. The children should not be receiving a pension, payment, or other government allowance and the care for them should take at least 35% of the time.
The limits, rates, and nature of Family Tax Benefit payments vary depending upon family income, the number of children, and ages of children, and change from year to year.
Dependent invalid and carer tax offset
This tax offset is only available to taxpayers who have care obligations for a dependent who is unable to work due to invalidity. It is capped at $2,766 and is subject to abatement for the 'adjusted taxable income' of the dependent, cutting out if this exceeds $11,150.
This offset is only available wif the individual's adjusted taxable income (after all deductions have been applied) is no more than $100,000.
Other personal tax offsets
There are additional tax offsets such as the Seniors and Pensioners Tax Offset, offsets for residing in isolated areas, and rebates for certain lump sums received in arrears (such as bonus or compensation from a past tax period for example).
Resident individuals are also entitled to Low and Middle Income Tax Offset. It's capped at $1,080 (phased out for those with a taxable income of up to $126,000) applicable from 2018/19 to the 2021/22 income years.
Health insurance premiums
Health insurance premiums that cover hospital treatments represent a tax offset (or a rebate provided directly against the premium).
The exact amount of the offset is income tested and depends on the age of the individual. Between April 1st 2020 and March 31st 2021, there is no entitlement to an offset, regardless of the age, if the adjusted taxable income exceeds $140,000 for singles or $280,000 for families. The offset for an individual under the age of 65 for that same period ranges from:
- 8.352% for taxable income ranging from $105,001 to $140,000 for singles and from $210,001 to $280,000 for families
- 16.706% for taxable income ranging from $90,001 to $105,000 for singles and from $180,001 to $210,000 for families
- 25.059% for taxable income ranging from $90,000 to $180,000 or less for families.
For individuals aged 65 years or over, the offsets could be as high as 33.413% for those aged 70 years whose taxable income is $90,000 or less for singles and $180,000 or less for families.
The offset entitlements are indexed annually.
Child care subsidy
A child care subsidy is available in circumstances where the individual:
- Cares for a child aged 13 or younger (14 to 18 with a disability), who's not attending secondary school, unless an exemption applies
- Uses an approved child care service
- Pays the child care fees
- Meets residency and immunisation requirements
The amount of Child Care Subsidy depends on each family's circumstances, but the government provides a Payment and Service Finder, which people can use to estimate how much subsidy they are entitled to.
Some families can qualify for an Additional Child Care Subsidy on top of the basic one, that is intended to provide extra help with covering the child care fees. It's awarded in three cases:
- a grandparent taking care of the child
- an individual is transitioning to work
- an individual is experiencing temporary financial hardship
Spouse contribution tax offset
Under certain conditions, an employee can receive a tax offset when they contribute to a spouse's superannuation fund or retirement savings account (RSA). They have to be a resident, and their spouse's assessable income should not exceed $40,000 (including reportable fringe benefits and employer superannuation contributions). The contribution the employee can make is maxed out at $3,000. The amount of the tax offset depends on the exact income of the spouse and the precise contribution. The maximum is $540 and applies if the spouse's assessable income (including reportable fringe benefits and employer superannuation contributions) is under $37,000.