01. The Australian Tax System

 

HISTORY 

 

Throughout Australia’s post-Federation period, income tax collections have been affected by the funding requirements of major World Wars and have certainly
played a role in the thorny issue of Commonwealth/State relations.

 

Prior to Federation in 1901, income tax was first imposed by the States starting with South Australia in 1884, closely followed by Victoria and NSW in
1895.

The Federal Government introduced an income tax in 1916 largely to fund Australia’s involvement in the First World War, but it was still the States that
collected income taxes, both for themselves and on behalf of the Federal Government. In 1932, at the time of the Great Depression, the Lyons Federal
Government briefly took over collection of income tax from the Lang Labor NSW Government. This constitutional crisis was soon resolved however, and
the states retained responsibility for tax collection when a new consolidated act (the Income Tax Assessment Act 1936) was passed in 1936.

However, in 1942, at the height of World War II, the Commonwealth took over all income tax collection. This position remains unchanged to the present day.
The States received annual grants from the Commonwealth to fund their revenue needs until 1 July 2000, when the Goods and Services Tax (GST) was introduced
with proceeds going directly to the States, replacing the grants system.

Over the years there were many changes and insertions into ITAA 1936, rendering the act incomprehensible even to many professionals.

In the mid 1990’s the Government decided to “simplify” matters by re-writing the complete act. This process commenced in 1997 with the introduction of
the Income Tax Assessment Act 1997 (ITAA 1997).

Eventually ITAA 1997 will supersede the prior 1936 Act. In 1998 the Howard Government began a comprehensive programme of tax reform and suspended further
activity on updating the 1997 Act. This will further delay completion of the 1997 Act. Until ITAA 1936 is completely re-written, tax professionals
need to be familiar with both Acts.

Over the years numerous taxpayers have argued, some at High Court level, that collection of taxes is unconstitutional. These attempts have proved fruitless
with Courts finding that the Commonwealth Government has full power to impose taxes provided it does not discriminate between the States and does not
impose taxes on property belonging to a State.

 

The Australian Taxation Office – A brief history

When the ATO announced 100 years of service to the Australian community, they outlined some key dates which we have further augmented:

1910 – Federal Land Tax Branch established with 105 staff – 15,000 returns assessed in first year.

1915 – Income Tax Assessment Act introduced.

1917 – Female employment introduced due to men away at war.

1924 – State Tax Office branches amalgamated.

1930 – The sales tax introduced.

1933 – Flour tax introduced for one year, at a time when flour production exceeded sale price.

1944 – The Pay-As-You-Earn (PAYE) tax system introduced.

1952 – Federal Land Tax abolished.

1966 – The decimal currency introduced in Australia.

1975 – The first tax computer system-the Central Taxpayer System – commenced operation.

1978 – A surge in tax avoidance schemes (known as bottom-of-the-harbour) resulted from soaring inflation and threatened the integrity
of the tax system.

1986 – Self-assessment introduced.

1987 – Electronic Lodgement System (ELS) for tax agent’s trialled.

1988 – The first ‘Tax Help’ volunteer program was introduced to help people in need prepare their tax returns.

1997 – The Taxpayers’ Charter introduced, setting out taxpayers’ rights and standards of service.

1999 – e-tax launched resulting in 27,000 lodgements.

2000 – Introduction of ‘The New Tax System’ – the ATO delivered the largest range of tax reforms in its history including the introduction
of the GST and Pay As You Go system as part of broader business tax reform.

2007 – Implementation of ‘Better Super’ – the biggest reform to superannuation ever.

2009 – A one-off tax bonus payment worth $7.7 billion was distributed to 8.7 million people. It was the largest payment ever made through
the tax system and one of the most significant in Australia’s history.

2010 – Over 2.3 million taxpayers lodged online using e-tax, which has evolved to include pre-filling, online help and automatic calculations.
The number of people using e-tax continued to rise until it was replaced by myTax in 2016.

2014 – In the wake of Operation Wickenby, the amnesty for Australians with offshore, tax avoidance funds closed in December of that year.
The ATO along with other G20 revenue authorities form a pact to tackle base erosion and profit shifting (BEPS).

2015 – Unprecedented clashes between States and the Commonwealth Government over the allocation of GST revenue.

2016 – The Government’s White Paper on tax reform abandoned in the heat of an Election year.

ATO AND TREASURY ROLES

 

The Treasury and the ATO are joint stewards of Australia’s tax system and aspects of Australia’s superannuation system. The ATO’s role is to effectively
manage and shape the tax and superannuation systems to support and fund services for Australians.

In this role, the ATO administer the tax law and key elements of the superannuation law, and provide advice to Treasury to support the development of tax
legislative measures. The Treasury is responsible for the design of the tax system and its components, and retirement income policy, in relation to
economic efficiency, equity, income distribution, budgetary requirements and economic feasibility.

The ATO’s working arrangements with Treasury are governed by a Tax and Superannuation Protocol, which encourages collaboration and early engagement, assurance
on the quality of new tax and superannuation law, and the earliest possible identification and communication of issues.

HOW LAWS ARE MADE

The legislation administered by the ATO is created by parliament.

A proposed law, or amendment to an existing law, is introduced into parliament in the form of a Bill. A Bill must be passed in identical form by both houses
of the parliament and then presented to the Governor-General for royal assent. If no date is specified, the law is enacted 28 days after the Bill receives
royal assent.

Legislative instruments are made under the authority of an Act. An Act may delegate or give power to make laws in the form of regulations, orders, by-laws
or other instruments to a particular person, or body of people.

LODGEMENT AND PAYMENT OF TAX 

The Australian income tax year starts on 1 July and ends on 30 June each year.

Income taxes are determined from taxable income disclosed in income tax returns which are required to be prepared and lodged each year by individuals,
trusts, partnerships, companies and other entities.

Each year required lodgement dates are gazetted; however, if a taxpayer is using a tax agent, extra time is normally granted in accordance with the tax
agent’s lodgement programme. Tax returns are lodged and assessed on an annual basis.

Individual taxpayers usually pay their taxes throughout the year under the Pay As You Go (PAYG) System which involves deductions from salaries and wages
or quarterly instalment tax payments.

Most individual business taxpayers are required to meet their tax obligations quarterly.

Income tax rates were reduced when the Goods and Services Tax (GST) was introduced on 1 July 2000, and some taxes such as sales tax were abolished. However,
some State taxes such as payroll tax still exist despite the Federal Government’s intention that they be abolished. The GST initially turned into a
cash windfall for the States.

Further obligations some taxpayers have are Business Activity Statements (
BAS) and Instalment Activity Statements (IAS).

Partnerships and Trusts do not normally pay tax. The income flows down to individual partners or beneficiaries who are assessed on the amounts distributed
to them.

In order to prevent double taxation of dividends, companies can frank their dividends (to reflect company tax paid) and these franking credits are refundable
to taxpayers if the amount of tax paid is less than the amount of the franking credit.

Franked dividends paid to discretionary trusts flow through to nominated beneficiaries who are able to claim the franking credits.

Taxable income is calculated by adding all assessable income, then deducting all allowable deductions from the total. To determine the actual tax payable
from the table below, multiply the taxable income by the marginal tax rate and deduct any tax offsets and credits.

 

2016/17 Income Tax Rates For Resident Individuals

 

Taxable Income $	Tax Payable
0 – $18,200	0%
$18,201 – $37,000	19% over $18,200
$37,001 – $87,000	$3,572 + 32.5% over $37,000
$87,001 – $180,000	$19,822 + 37% over $87,000
$180,001 +	$54,232 + 47% over $180,000

*The above rates do not include the Medicare Levy of 2.0%.2017/18 Income Tax Rates For Resident Individuals

 

Taxable Income $	Tax Payable
0 – $18,200	0%
$18,201 – $37,000	19% over $18,200
$37,001 – $87,000	$3,572 + 32.5% over $37,000
$87,001 – $180,000	$19,822 + 37% over $87,000
$180,001 +	$54,232 + 45% over $180,000

*The above rates do not include the Medicare Levy of 2.0%.Note the temporary Budget Repair Levy is set to cease from 1 July 2017, Labor have indicated
they will oppose its removal.

Payments to Working Holiday Makers from 1 January 2017

 

Taxable Income $	Tax Payable
0 – $37,000	15%
$37,001 – $87,000	$5,550 + 32.5% over $37,000
$87,001 – $180,000	$21,800 + 37% over $87,000
$180,001 +	$56,210 + 45% over $180,000

 Note that Medicare Levy is not payable by Working Holiday Makers who are non-residents for tax purposes. Also the Temporary Budget
Repair Levy will apply to payments in excess of $180,000 made between 1 January & 30 June 2017.

2016/2017 Resident Minors – Unearned (Division 6AA) Income

The following rates apply to the income of certain minors (e.g. persons under 18 years of age on the last day of the income year who are not classed as
being in a full-time occupation) that is not excepted income (e.g. employment income). Note that Medicare Levy may also be payable and resident minors
are not entitled to the low-income tax offset in respect of ‘unearned income.’

 

Division 6AA Income $	Tax Payable *
0 – $416	Nil
$417 – $1,307	68% of excess over $416
$1,308+	47% of the entire amount

*The above rates do not include the Medicare Levy of 2% Note from 1 July 2017 the respective tax rates are 66% and 45% due to the removal of the
Temporary Budget Levy.

 

2016/2017 Assessment – Resident Deceased Estate

 

The following rates apply where a trustee is assessed under S.99 ITAA 1936 in respect of a resident deceased estate. Where the date of death is less than
3 years before the end of the income year, the trustee is assessed as a resident individual, with no Medicare Levy.

 

 

  

MEDICARE LEVY 

 

In addition to income tax, a Medicare levy of 2.0 per cent is charged on a resident taxpayer’s taxable income. Note that from 1 July 2019, the Medicare
Levy is proposed to increase to 2.5% to ensure the National Disability Insurance Scheme is fully funded.

Note that some taxpayers are exempt from the Medicare levy because of their foreign earnings status, or the type of health care which is provided to them.

The below figures are for the year ended 30 June 2017.

Category of taxpayer	No levy payable if taxable income or family income does not exceed (figure for 2015-16)	Reduced levy if taxable income or family income is within range (inclusive)	Ordinary rate of levy payable where taxable income or family income is equal to or exceeds (figure for 2015-16)
Individual taxpayer	21,655 (21,335)	21,656 – 27,068	27,069 (26,669)
Single taxpayers eligible for SAPTO	34,244 (33,738)	34,245 – 42,805	42,806 (42,173)
Families eligible for SAPTO	47,670 (46,966)	47,671 – 59,587	59,588 (58,708)
Families with the following children and/or students	(family income) 36,541 (36,001)	(family income) 36,542 – 45,676	(family income) 45,677 (45,022)

Low-income earners are exempt, so that in 2016/17, if taxable income is $21,655 or less, no Medicare levy is payable.

MEDICARE LEVY SURCHARGE 

 

The Medicare Levy surcharge is currently (2016-2017 financial year) paid by people who earn more than $90,000 (single) or $180,000 (family) and don’t have
private health insurance hospital cover. Note, the thresholds go up by $1,500 per dependent after the second child or student.

From 1 July, 2012 changes applied to the Medicare Levy surcharge income test.

If you or your family don’t have hospital cover, or you do not maintain your cover, you may have to pay the Medicare Levy surcharge based on the new income
test. Using the below table you can work out your tier to see if the changes will affect you.

Income thresholds for 2016–17

 

Unchanged	Tier 1	Tier 2	Tier 3
Singles	$90,000 or less	$90,001 – 105,000	$105,001 – 140,000	$140,001 or more
Families*	$180,000 or less	$180,001 – 210,000	$210,001 – 280,000	$280,001 or more
Rates	0.0%	1.0%	1.25%	1.5%

* The family income threshold is increased by $1,500 for each Medicare levy surcharge dependent child after the first child.In the May 2016 Federal Budget
the Government announced it would continue to pause on indexation of the Medicare Levy Surcharge and Private Health Insurance till 30 June 2021.

 

TAXATION RULINGS 

 

A system of public and private rulings was introduced on 1 July 1992. A public ruling or determination essentially sets out the ATOs interpretation of
the legislation applied to certain situations. Public Rulings may be relied upon as they are binding on the
ATO. If a taxpayer takes a matter to court, it is possible for an unfavourable ruling to be overruled.

If a taxpayer requires guidance before making a claim or entering a transaction, a private ruling may be applied for. Once issued, private rulings are
binding on the
ATO for that particular taxpayer only. Individuals are able to apply for binding oral rulings for simple tax matters. The application must be made
orally and generally by the person concerned.

 

FAMILY PAYMENTS – KEY ASPECTS 

 

Eligibility Basics

• have a dependent child or full time secondary student younger than 20 years of age who is not receiving a pension, payment or benefit such as Youth
  Allowance
• provide care for the child for at least 35% of the time
• meet an income test

Eligibility for FTB Part A

Family Tax Benefit (FTB) Part A is paid per child. The amount paid depends on your family’s circumstances.

You may be eligible for FTB Part A if you care for a dependent child who is:

0 to 15 years of age, or

16 to 19 years of age, and

• is in full time secondary study in an approved course leading towards a year 12 or equivalent qualification
• has an acceptable study load, or
• has been granted an exemption

If your child is 16 to 19 years of age and is in full time secondary study, you will receive payments until the end of the calendar year they turn 19 years
of age.

Children that are 16 to 19 years of age who are in home school must be in an approved course leading towards a year 12 or equivalent qualification to meet
the study requirements.

You must also meet an income test and residence requirements and care for the child at least 35% of the time.

You’ll need to take reasonable steps to obtain child support if you’re separated from the child’s other parent.

You will also receive the Newborn Upfront Payment and Newborn Supplement if you:

are eligible for FTB Part A

recently become a parent through birth or adoption

Newborn Supplement is paid for up to 13 weeks with your regular fortnightly FTB Part A payment.

Eligibility for FTB Part B

Family Tax Benefit (FTB) Part B gives extra assistance to:

single parents

non parent carers such as grandparents, great grandparents, and

couples with one main income

An example of this may be where one parent stays at home to care for a child full time or balances some paid work with caring for a child. This payment
is income tested.

If you are a member of a couple, you may be eligible for FTB Part B if you care for a dependent child 12 years of age or younger at least 35% of the time.

If you are a single parent, grandparent or great grandparent carer, you may be eligible for FTB Part B if you care for a child at least 35% of the time
and the child is:

younger than 16 years of age, or

a full time secondary student, up until the end of the calendar year in which they turn 18 years of age

Home schooling for children 16 to 19 years of age does not satisfy study requirements for FTB.

The rate of FTB Part B is based on an income test. You also need to meet residence requirements.

You may be eligible for FTB Part B if you are a:

parent

guardian

foster carer

grandparent

great grandparent, or

another non parent carer

Immunisation Requirements

 

To get Family Tax Benefit (FTB) Part A supplement and Child Care Benefit your child must meet immunisation requirements.

Income Tests FTB Part A

 

If you or your partner receives an income support payment or your family’s adjusted taxable income is $52,706 or less,
you may receive the maximum rate of FTB Part A. Shading provisions apply on income over this level depending on family circumstances and number of
dependents.

Income Test FTB Part B

 

Family Tax Benefit (FTB) Part B is for single parents and couples where the primary earner has an adjusted taxable income of $100,000 or less per year. 

 

We note there are many variables impacting eligibility, we urge carers to seek further information from the Department of Human Services.

NON-RESIDENT INDIVIDUALS 

 

Non-residents are usually only required to pay Australian tax on income derived in Australia. They are not taxed on fully franked dividends and a withholding
tax system (15%) applies to unfranked dividends.

As non-residents are not eligible for the tax-free threshold, it is necessary for them to lodge an Australian tax return.

 

 

 

2017/18 INCOME TAX RATES FOR NON-RESIDENT INDIVIDUALS

Taxable Income $	Tax Payable *
0 – $87,000	32.5%
$87,001 – $180,000	$28,275 + 37% over $87,000
$180,001 +	$62,685 + 45% over $180,000

The following table sets out the income tax rates that apply to non-resident individuals for 2016/17:

Taxable Income $	Tax Payable *
0 – $87,000	32.5%
$87,001 – $180,000	$28,275 + 37% over $87,000
$180,001 +	$62,685 + 47% over $180,000

*The Medicare Levy is not payable by non-residentsHECS-HELP REPAYMENT THRESHOLDS

 

The Higher Education Loan Programme (HELP) offers Commonwealth loans to eligible students to assist them with paying their higher education fees and to
study overseas. A HELP debt is repaid through the taxation system on a taxpayer’s ‘repayment income’.

Repayment income is the sum of the taxpayer’s:

-taxable income;

-total net investment loss;

-reportable fringe benefits;

-exempt foreign employment income; and

-reportable superannuation contributions.

HELP Repayment Thresholds (including accumulated HECS debt)

 

Rate of Repayment %	2016-17 HELP Repayment Income (HRI*)	2017-18 HELP Repayment Income (HRI*)
Nil	Below $54,869	Below $55,874
4.0% of HRI	$54,869 – $61,119	$55,874 – $62,238
4.5% of HRI	$61,120 – $67,368	$62,239 – $68,602
5.0% of HRI	$67,369 – $70,909	$68,603 – $72,207
5.5% of HRI	$70,910 – $76,222	$72,208 – $77,618
6.0% of HRI	$76,223 – $82,550	$77,619 – $84,062
6.5% of HRI	$82,551 – $86,894	$84,063 – $88,486
7.0% of HRI	$86,895 – $95,626	$88,487 – $97,377
7.5% of HRI	$95,627 – $101,899	$97,378 – $103,765
8.0% of HRI	$101,900 and above	$103,766 and above

*HRI = Taxable income plus any total net investment loss (which includes net rental losses), total reportable fringe benefits amounts, reportable superannuation contributions and exempt foreign employment income.

 

From 1 July 2016, Higher Education Loan Program (HELP) debtors residing overseas for six months or more are required to make repayments of their debt,
where their worldwide income exceeds the same minimum repayment threshold. It is proposed from 1 July 2018 that the repayment threshold will be lowered
to $42,000, with a 1% repayment, with the upper repayment percentage increasing to 10% on HRI’s over $119,182.

COMPANY RATES OF TAX – 2017/18

General Company Tax Rate

 

Description of Taxpayer	Rate %
Base Rate Entities (see turnover thresholds below)	27.5
Private companies (except life insurance companies RSAs +PDFs)	30
Public companies (except life insurance companies RSAs +PDFs)	30
Corporate Unit Trusts	30
Corporate Limited Partnerships	30
Public Trading Trusts	30
Strata Title Bodies Corporate	30

 

The Government is aiming to reduce the Company Tax rate to 25 per cent over 10 years.

Year Annual Aggregated Company Tax Rate

Turnover Less Than

2016/17 $10m 27.5%

2017/18 $25m 27.5%

2018/19 $50m 27.5%

2019/20 $50m 27.5%

2020/21 $50m 27.5%

2021/22 $50m 27.5%

2022/23 $50m 27.5%

2023/24 $50m 27.5%

2024/25 $50m 27.0%

2025/26 $50m 26.0%

2026/27 $50m 25.0%

Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.

PROPOSED INCREASES TO THE UNINCORPORATED SMALL BUSINESS TAX DISCOUNT

In the May 2016 Federal Budget it was announced the tax discount for unincorporated small businesses will increase incrementally over 10 years from 5 per
cent to 16 per cent.

The tax