Throughout Australia’s post-Federation period, income tax collections have been affected by the funding requirements of major World Wars. They 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. However, the States still 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 the collection of income tax from the Lang Labor NSW Government. However, this constitutional crisis was soon resolved, 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-1990s, 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, further delaying the 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 that collecting taxes is unconstitutional, some at the High Court level. 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 to include changes in taxation policy.
1910 – Federal Land Tax Branch established with 105 staff – 15,000 returns assessed in the first year.
1915 – Income Tax Assessment Act introduced.
1917 – Female employment was introduced due to men being away at war.
1924 – State Tax Office branches amalgamated.
1930 – The sales tax was introduced.
1933 – Flour tax was introduced for one year, at a time when flour production exceeded sale price.
1944 – The Pay-As-You-Earn (PAYE) tax system was introduced.
1952 – Federal Land Tax abolished.
1966 – The decimal currency was 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 tax system’s integrity.
1986 – Self-assessment introduced.
1987 – Electronic Lodgement System (ELS) for tax agents was trialled.
1988 – The first ‘Tax Help’ volunteer program was introduced to help people in need prepare their tax returns.
1997 – The Taxpayers’ Charter was 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 most extensive range of tax reforms in its history, including introducing the GST and Pay As You Go system as part of broader business tax reform.
2007 – Implementation of ‘Better Super’ – the most significant 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 and 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 was abandoned in the heat of an election year.
2020 – The cash flow boost and JobKeeper allowance, both administrated by the ATO, help keep the economy afloat during the Covid-19 crisis.
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.
The ATO administers the tax law and key elements of the superannuation law and provides advice to Treasury to support the development of legislative tax 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 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 the 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 generally 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 to abolish them. 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.
2020/21- and 2021/22-Income Tax Rates for Resident Individuals
|Taxable income $||Tax Payable|
|0 – $18,200||0%|
|$18,201 – $45,000||19% over $18,200|
|$45,001 – $120,000||$5,092 + 32.5% over $45,000|
|$120,001 – $180,000||$29,467 + 37% over $120,000|
|$180,001 +||$51,667 + 45% over $180,000|
*The above rates do not include the Medicare Levy of 2.0%.
*The tax-free threshold may effectively be higher for taxpayers eligible for the Low-Income Tax Offset, the Low- and Middle-Income Tax Offset, the Seniors and Pensioners Tax Offset and or certain other tax offsets.
Payments to Working HolidayMakers rates for 2020/21 and 2021/22
|Taxable income $||Tax Payable|
|0 – $45,000||15%|
|$45,001 – $120,000||$6,750 + 32.5% over $45,000|
|$120,001 – $180,000||$31,125 + 37% over $120,000|
|$180,001 +||$53,325 + 45% over $180,000|
*Note that Medicare Levy is not payable by Working Holiday Makers who are non-residents for tax purposes.
2020/2021 and 2021/22 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||66% of excess over $416|
|$1,308+||45% of the entire amount|
*The above rates do not include the Medicare Levy of 2%
2020/2021 and 2021/22 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 or tax offsets.
|Taxable income $||Rate % *|
|Less than 3 years since death|
|0 – $18,200||Nil|
|$18,201 – $45,000||19% of excess over $18,200|
|$45,001 – $120,000||$5,092 + 32.5% of excess over $45,000|
|$120,001 – $180,000||$29,467 +37% of excess over $120,000|
|$180,001+||$51,667 + 45% of excess over $180,000|
3 Years or more since death
|0 – $416||Nil|
|$417 – $670||50% of excess over $416|
|$671 – $45,000||$127.30 +19% excess over $670|
|$45,001 – $120,000||$8,550 + 32.5% of excess over $45,000|
|$120,001 – $180,000||$32,925 +37% of excess over $120,000|
|$180,001+||$55,125 + 45% of excess over $180,000|
In addition to income tax, a Medicare levy of 2.0 per cent is charged on a resident taxpayer’s taxable income.
Some taxpayers are exempt from the Medicare levy because of their foreign earnings status, or the type of health care provided to them.
The below figures are for the year ended 30 June 2021.
|Category of taxpayer||No levy payable if taxable income or family income does not exceed (figure
|Reduced levy if taxable income or family income is within range (inclusive)||The ordinary rate of levy payable where taxable Income or family income is equal to or exceeds (figure for 2020-21)|
|Individual taxpayer||23,226 (22,801)||23,227 – 29,032||29,033 (28,502)|
|Single taxpayers eligible for SAPTO||
36,706 – 45,881
|Families eligible for SAPTO||51,094 (50,191)||51,094 – 63,867||63,868 (62,739)|
|Families with the following children and/or students||(Family income)
39,168 – 48,958
Low-income earners are exempt, so that in 2020/21 if taxable income is less than $23,226 (single) or $39,167 (couple), no Medicare levy is payable. The family income threshold increases by a further $3,597 for each extra child or student.
MEDICARE LEVY SURCHARGE
The Medicare Levy surcharge is currently (2020-2021 financial year) paid by people who earn more than $90,000 (single) or $180,000 (family) and do not have private health insurance hospital cover. Note, the thresholds go up by $1,500 per dependent after the second child or student.
If you or your family do not have hospital cover or maintain your cover, you may have to pay the Medicare Levy Surcharge. Using the below table, you can work out your tier to see if the changes will affect you.
Income thresholds for 2020–21 and 2021-22
|Unchanged||Tier 1||Tier 2||Tier 3|
|$90,001 – 105,000||$105,001 – 140,000||$140,001
|$180,001 – 210,000||$210,001 – 280,000||$280,001
* 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 the Medicare Levy Surcharge and Private Health Insurance indexation until 30 June 2021. This has now been extended a further two years until 30.06.2023.
A system of public and private rulings was introduced on 1 July 1992.
A public ruling or determination essentially sets out the ATO’s 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
- 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 aged 16 to 19 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 will need to take reasonable steps to obtain child support if you are 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
Homeschooling for children 16 to 19 years of age does not satisfy the 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:
- foster carer
- great grandparent, or
- another non-parent carer
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 $56,317 or less. In that case, you may receive the maximum rate of FTB Part A. Shading provisions apply on income over this level depending on family circumstances and the 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 $100,900 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-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.
The following table sets out the income tax rates that apply to non-resident individuals for 2020/21 and 2021/22:
|Taxable income $||Tax Payable *|
|0 – $120,000||32.5%|
|$120,001 – $180,000||$39,000 + 37% over $120,000|
|$180,001 +||$61,200 + 45% over $180,000|
*The Medicare Levy is not payable by non-residents
The tax-free threshold that applies to residents ($18,200 in 2020/21) is effectively pro-rated in an income year in which a taxpayer either ceased to be or became a resident for tax purposes. For the 2021 income year, the pro-rated threshold is calculated using the following formula:
$13,464 + ($4,736 x number of months taxpayer was resident for the year / 12)
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 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.
A new set of HELP repayment thresholds
From 1 July 2021, the new minimum HELP (Higher Education Loan Program) repayment threshold will be $47,014 with a one per cent repayment rate, with a further 17 thresholds and repayment rates, up to a top threshold of $137,897 at which ten per cent of income is repayable.
Changes to indexation arrangements
From 1 July 2019, HELP repayment thresholds will be indexed using the Consumer Price Index (CPI) instead of Average Weekly Earnings (AWE). This will ensure repayment requirements are adjusted in line with the cost of living and streamlines indexation factors currently used.
Amend the order of repayment of some student loan debts
From 1 July 2019, Student Financial Supplement Scheme (SFSS) debts are repaid after HELP debts are discharged. The repayment thresholds for SFSS have also been brought into line with the HELP repayment thresholds.
Increase to the FEE-HELP loan limit for 2021
From 1 January 2020, students studying medicine, dentistry and veterinary science courses benefit from a substantial increase in their loan limit, from an estimated $130,552 in 2019 to a new limit of $155,448. Students studying all other courses will have a loan limit of $108.232. These amounts are still indexed annually.
COMPANY RATES OF TAX – 2020/21
General Company Tax Rate
|Description of Taxpayer||Rate %|
|Base Rate Entities (see turnover thresholds below)||26|
|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|
Base Rate Entity
A reduced corporate tax rate of 26% applies for the 2021 income year to a corporate tax entity that is a base rate entity (BRE). In this regard, under current legislation, a corporate tax entity will be a BRE for 2017-18 to 2020-21 income years if it ‘carries on business’ and has aggregated annual turnover (worked out at the end of the 2021 income year) of less than $50 million. Legislation was passed to amend the 2018 definition of a BRE to remove the requirement that a BRE ‘carry on business’ and replace it with a requirement that no more than 80% of its assessable income is passive income. For 2021 income year, a company will qualify as a BRE where its:
- aggregated turnover (worked out at the end of the year) is less than $50 million; and
- no more than 80% of its assessable income for the year is BRE passive income.
Reference can be made to TR 2019/1 in relation to the ATO’s broader views regarding when a company will be considered ‘carrying on business’.
Franking credits will be distributed in line with the rate of tax paid by the company making the distribution.
Note: As of 1 July 2021, the company tax rate for base rate entities is 25%.
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 would increase incrementally over 10 years from 5 per cent to 16 per cent.
The tax discount applies to the income tax payable on the business income received from an unincorporated small business entity. The discount will be extended to individual taxpayers with business income from an unincorporated business with aggregated annual turnover of less than $5.0 million.
These measures coincide with the staggered cuts in the corporate tax rates.
In the April 2019 Federal Budget, it was announced the Government would increase the discount rate to 13% in 2020/21 and then 16% in 2021/22. Note that this discount is capped at $1,000 per individual for each income year and is a tax offset.
The discount rate increased to 16% on 1 July 2021.
In situations where the trustee chooses not to allocate income to a beneficiary, the income is accumulated. In such instances, the tax is assessed at the highest marginal tax rate (45%) plus Medicare.
AUSTRALIAN BUSINESS NUMBER
The Australian Business Number (ABN) is a single identifier for all business dealings with the ATO and dealings with other government departments and agencies.
An ABN is required if:
- You carry on a business
- You establish a self-managed superannuation fund
- You request endorsement of an income exempt charity or as a deductible gift recipient.
If a supplier does not have an ABN and if you are making a total payment of more than $75 (excluding GST), you will have to withhold 47 per cent of that payment and remit that amount to the ATO. If the supplier has an ABN, make sure that they quote it on their invoice to you.
If you are a Family Trust, you must show both the ACN (Australian Company Number) of the Corporate Trustee and the ABN of the Trust on your tax invoices. If you are a company, you must display your ABN on all tax invoices. The ABN can be used instead of the ACN on other public documents, provided the ACN represents part of your ABN.
Are you using your ABN?
Keeping up to date with your tax, super and business registration obligations help the ATO know your business is active and you need an Australian Business Number (ABN).
If you haven’t used your ABN for a while, the ATO may contact you about cancelling your ABN. They may also contact you about your ABN if your business situation has changed.
Your ABN data is a vital source of information for businesses, the Government, and the community. ABN data provides important business details so that government agencies can deliver support measures during unfortunate events.
To ensure you don’t miss out on government support, it is essential that you regularly review your ABN details and keep them up to date. You should cancel your ABN if your business is no longer operating, so government agencies can tailor their support to those who need it.
It’s essential to check that you have listed the physical address of your business.
You can check and update your ABN details online at any time or contact the ATO if you need further assistance.
TAX FILE NUMBERS
Whether individual or entity, all taxpayers must have a Tax File Number (TFN). The ATO uses the TFN to identify you, and it must be used on all documents lodged with the ATO, including taxation returns.