Tax for Australians For Dummies E-Book

Jimmy B. Prince

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 452

Veröffentlichungsjahr: 2023

Beschreibung

Tackle your taxes with ease – and get the most from your next return!

Do you want to be sure you're getting the maximum tax refund? Of course you do! Luckily, Tax for Australians For Dummies makes it easy to ensure you get every cent you deserve. Written by respected tax specialist and CPA fellow Jimmy B. Prince, this fun and friendly guide walks you step-by-step through the complex Australian tax system. It explains in plain English what you can claim — and exactly what you're owed.

Tax for Australians For Dummies has you covered from every angle: from family tax benefits to electric cars, superannuation tax thresholds to working-from-home deductions, personal investments to business concessions, and much more. Full of top tips and quick facts, this new and revised 9th edition will ensure you’re up to date with the latest tax changes. Whether you prepare your tax return online or go to an accountant, you’ll find something inside that will take your return from “What?” to “Wow!” in no time.

• Includes up-to-date tax rates and superannuation thresholds
• Explains Fringe Benefits Tax and Capital Gains Tax
• Covers tax and financial hardship and relief measures

If you’re an employee, investor, small-business owner, retiree or even a student, Tax for Australians For Dummies is the no-nonsense, easy-to-follow guide that answers all of your tax questions.

Leseprobe

Tax for Australians®

To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Tax for Australians Cheat Sheet” in the Search box.

Table of Contents

Cover

Title Page

Copyright

Introduction

About This Book

Foolish Assumptions

Icons Used in This Book

Where to Go From Here

Part 1: How You’re Taxed in Australia

Chapter 1: Understanding the Australian Tax System

Explaining the Australian Tax System

Understanding Your Income Tax Rates

Taxing Major Income Streams

Taxing a Company

Chapter 2: Taxing Australians: The Formula You Need to Know

Doing Your Sums

Declaring What You Earn: Assessable Income

Keeping What You Receive: Exempt Income

Reducing Your Tax Bill: General Deductions

Looking for Tax Offsets

Chapter 3: Lodging Your Tax Return: This One Is for the Nation

Preparing Your Individual Tax Return

Receiving a Thank-You Note: Notice of Assessment

Preparing Other Tax Returns

Neglecting to Lodge Your Prior Years’ Tax Returns

Chapter 4: Receiving a Visit: When the Tax Office Comes Knocking

Being Honest with Yourself: Self-Assessment

Getting a Reality Check: Tax Audit

Mending Your Ways: Amendments and Objections

Part 2: Income from Personal Exertion

Chapter 5: Taxing Employees: Working Class Folk

Earning a Living: Salary and Wages

Working Out Your Income Tax Rate

Claiming a Tax Deduction: What’s On the Menu

Chapter 6: Living in Your Castle: Main Residence

Addressing the Issue: This is Where I Live

Buying Your Main Residence: Taxation Concessions

Keeping What’s Yours: Exempt from Tax

Sharing What’s Yours: When You Have to Pay Tax

Maintaining a Home Office

Transferring Property: Marriage or Relationship Breakdown

Chapter 7: Taxing Issues Affecting Students and Your Children

Raiding the Piggy Bank: Taxing Under 18s

Getting a Distribution from a Trust

Checking Out Special Disability Trusts

Getting Something Back: Family Tax Offsets

Part 3: Tax-Effective Investments

Chapter 8: Interesting Stuff: Bank Deposits and Tax

Banking the Return: Interest

Interesting Claims

Investing in Company or Government Bonds

Investing in Life Insurance Bonds

Chapter 9: Owning Part of the Company: Investing in Shares

Sharing the Profits: Dividends

Taxing Your Gains and Losses

Investing in Overseas Share Markets

Chapter 10: Building Your Dreams: Investing in Bricks and Mortar

Collecting the Rent

Reducing the Costs: What You Can Claim

Apportioning Expenditure: The Bits You Can’t Claim

Claiming Specific Deductions: What’s on the List

Chapter 11: Catching Up on Capital Gains Tax

Looking at the Rules: CGT Assets

Calculating a Capital Gain

Selling or Transferring Your Business Premises to Your SMSF and CGT

Investing in Cryptocurrency and CGT

Part 4: Running a Business

Chapter 12: Structuring Your Business for Maximum Gain

Choosing a Business Entity

Becoming a Sole Trader: Going It Alone

Forming a Partnership: Sharing the Workload

Creating a Company: The More the Merrier

Trusting in Trusts

Chapter 13: Starting a Business: On Your Mark! Get Set! Go!

Getting the Show on the Road

Getting to Grips with Record Keeping

Taking on Employees

Examining Tax Concessions for Small Business

Choosing How You Recognise Your Income

Taking Stock of Things

Planning Ahead: Business Succession Planning

Chapter 14: Reducing Your Small Business Tax Bill

Understanding the Rules and What You Can Claim

Getting Specific with Problematic Deductions

Chapter 15: Collecting Tax for the Government: Goods and Services Tax

Collecting 10 Per Cent

Registering for GST

Paying the GST

Chapter 16: Living on the Fringe: Fringe Benefits Tax

Coming to Terms with FBT

Calculating the FBT

Determining a Car’s FBT

Packaging Your Salary

Chapter 17: Getting Wealthy: CGT and Small Business

Keeping What You Sow: Tasting the Tax Incentive Goodies

CGT Concessions for Small Business

Identifying Common Tax Mistakes: CGT Concessions for Small Business

Part 5: Thinking Long Term

Chapter 18: Preparing for Retirement Using Superannuation

Complying and Non-Complying Super Funds

Choosing a Goose to Lay the Golden Egg

Taxing Your Nest Egg

Making a Contribution: Understanding the Rules

Getting the Money: Conditions of Release

Chapter 19: Reaping What You Sow: Receiving a Pension and Government Concessions

Paddling the Superannuation Stream: Types of Super Pension

Getting Help: Government Pensions and Allowances

Chapter 20: Death and Taxes: Wills and Asset Distribution

Preparing a Will

Taxing Your Income

Sharing Your Pension

Taxing All Your Treasures

Part 6: The Part of Tens

Chapter 21: Ten Ways to Minimise Your Tax while Keeping the Tax Office Happy

Keep Good Records

Take Advantage of New Developments

Get a Helping Hand from the Tax Office

Lose Money the Right Way

Contribute to a Super Fund

Claim a Super Tax Deduction

Take Advantage of the Low Income Threshold

Package Your Salary

Tap In to Negative Gearing

Account for Income and Deductions

Chapter 22: Ten Common Tax Mistakes to Avoid

Not Adhering to Small Business Tax Requirements

Not Keeping Your Business Records in Shape

Not Registering for (Or Collecting) GST Properly

Understating Your Income

Overstating Your Deductions

Incorrectly Claiming Certain Expenses

Not Following the Tax Rules for CGT

Not Running a SMSF by the Book

Not Adhering to the Guidelines of a SMSF Pension Fund

Not Complying with Tax Rules for Real Estate

Appendix A: Taxing the Visitors: Non-Residents

Appendix B: Leading Tax Cases and Tax Office Publications: Study Guide

Leading Tax Cases

Tax Office Publications

Glossary

Index

About the Author

Connect with Dummies

End User License Agreement

List of Tables

Chapter 3

TABLE 3-1 Eligibility for the Low Income Tax Offset

Chapter 5

TABLE 5-1 Employment Termination Payments (ETP)

TABLE 5-2 Individual Income Tax Rate for Australian Residents, 2023–24

Chapter 6

TABLE 6-1 First Home Owner Grant — Eligibility

Chapter 7

TABLE 7-1 Division 6AA — Penal Rate of Income Tax

Chapter 18

TABLE 18-1 Preservation Age

Chapter 19

TABLE 19-1 Minimum Superannuation Pension Payments

TABLE 19-2 Seniors and Pensioners Tax Offset (SAPTO)

Appendix A

TABLE A-1 Individual Income Tax Rate for Australian Non-residents, 2023–24

List of Illustrations

Chapter 2

FIGURE 2-1: Charting the tax formula.

Chapter 11

FIGURE 11-1: Understanding the dynamics of CGT at a glance.

Chapter 15

FIGURE 15-1: Understanding the three types of GST sales.

FIGURE 15-2: Providing the correct details on your tax invoice.

Chapter 18

FIGURE 18-1: Making a superannuation contribution.

FIGURE 18-2: Receiving a superannuation lump sum payment.

Chapter 19

FIGURE 19-1: Taxing your superannuation pension.

Chapter 20

FIGURE 20-1: The death benefit income stream.

Appendix A

FIGURE A-1: Income sourced in Australia by non-residents.

Guide

Cover

Table of Contents

Title Page

Copyright

Begin Reading

Appendix A: Taxing the Visitors: Non-Residents

Appendix B: Leading Tax Cases and Tax Office Publications: Study Guide

Glossary

Index

About the Author

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Tax for Australians For Dummies®, 9th Edition

Published by

John Wiley & Sons, Australia Ltd

Level 4, 600 Bourke Street

Melbourne, Vic 3000

www.dummies.com

Copyright © 2024 John Wiley & Sons Australia, Ltd

The moral rights of the author have been asserted.

ISBN: 978-1-394-23741-8

All rights reserved. No part of this book, including interior design, cover design and icons, may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording or otherwise) without the prior written permission of the Publisher. Requests to the Publisher for permission should be addressed to the Legal Services section of John Wiley & Sons Australia, Ltd, Level 19, 15 William Street, Melbourne, Vic 3000, or email [email protected].

Cover image: © fizkes/Adobe Stock Photos

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDERSTANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANISATION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFORMATION THE ORGANISATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ.

Trademarks: Wiley, the Wiley logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Making Everything Easier, dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons Australia, Ltd is not associated with any product or vendor mentioned in this book.

Introduction

Australian income tax law can be very complicated and difficult to understand. You may need to thumb through two income tax assessment Acts equivalent in size to four telephone books, thousands of income tax rulings and a library full of legal books to find the right answer!

The dominant purpose of the income tax legislation is to raise revenue by levying a tax on taxable income. The tax Acts point out that assessable income minus deductions equals taxable income, and then tell you the rules you need to follow to calculate your assessable income and allowable deductions. The Acts also tell you who must pay income tax and how to work out how much income tax you must pay.

Generally, you have a choice of two ways to solve your tax liability problems: You can either pay a registered tax agent or solicitor who specialises in income tax law, or you can try to find out the answer yourself. If you pay someone, you quickly find that the meter starts ticking the moment you walk through the door or pick up the phone. Although seeking professional advice is highly recommended and encouraged, you need never underestimate your own abilities. If you use basic research skills that you acquired during your student days plus the skills you use to do your job, you may be pleasantly surprised at how adept you are at taking on responsibility for your own tax journey.

So, if you have a winning edge — the skills to do basic research — why not have a go? If you can’t solve your problem or you lack confidence, at least you tried. And if you do seek professional advice, you’re in a position to have a meaningful conversation (especially if the fee is substantial!). As a student once said to me, ‘I’ll at least be in a position to verify and check the facts out myself and not feel like a fool!’

About This Book

This 2023–24 edition of Tax for Australians For Dummies caters to tax beginners and is also useful as a quick reference for the more tax-savvy readers. As well as helping you come to terms with the basic principles of income tax law, it also appeals to students who plan to study tax law, because it closely follows the content of a standard course syllabus. This book explains in simple terms core tax concepts that you need to be aware of when dealing with Australian tax issues. Throughout this book, case studies reinforce core tax principles. Also, you have the option of checking out technical information such as references to major Tax Office fact sheets and income tax rulings that tax professionals use and rely on to solve tax issues. This level of information is useful to readers who are studying income tax law or who wish to understand how the Tax Office comes to certain tax conclusions in its own interpretation of the tax laws.

To keep things consistent and easy to follow, here are a couple of the conventions this book uses:

Tax terms appear in italics and are closely preceded or followed by an easy-to-understand definition.

When I reference tax office publications or provide websites of interest, I include the address in a special typeface like this:

www.ato.gov.au

.

Foolish Assumptions

I wrote this book with some assumptions in mind. I assume that

You’re in one or more of the following categories: Accountant or adviser on tax, employee, employer, investor, retiree, self-employed, taxation student or working in the tax industry.

You want simple facts on the complex subject of tax in an easy-to-use format.

You want to have on hand the many ways to minimise your tax while keeping the Tax Office happy.

You’re likely to be aged 18 years and upwards.

Icons Used in This Book

Some people are more visual than others. That’s where icons come in handy. This book uses several icons in the page margin and each has a little titbit of information associated with it. Here’s what each icon means.

If you’re keen and eager to discover more about tax, this icon points you to handy websites to help you quickly solve tax issues that may come your way.

Everyone can use a friendly reminder. The Remember icon is a quick and easy way to identify some of the more important tax points that you may want to make note of throughout the book.

Sometimes I get carried away with the technical stuff. You may find this level of information really interesting, or you may be bored to tears. Skip it if you wish or use it if you want a more complete understanding of your tax issue.

Tips include tax information that can help you save time or cut down on frustration.

Text flagged with the Warning icon can keep you out of trouble. Serious legal issues encourage you to watch your tax step.

Where to Go From Here

Tax for Australians For Dummies may not be the exciting novel that you read from cover to cover. Rather, you can dip in and out to suit the occasion (tax return time) or when your interest level is piqued (due to a change in personal circumstance or making plans for your retirement).

Each chapter is designed to give you a good overview of a specific tax topic you may be interested in, with case studies to reinforce the learning process. If you’re after a crash course on how Australians are generally taxed, flip to Part 1. The chapters in Part 2 cover tax issues relating to individuals, Part 3 is all about tax and your precious investments, Part 4 talks about business taxation, and Part 5 has all your long-term tax queries covered. For a quick rundown on clever but legal ways to minimise tax and common mistakes to avoid, check out Part 6. If you wish to brush up on a particular tax term, you can flip to the Glossary for a quick prompt.

While sitting in a comfortable chair or at your desk with a cup of coffee (and a suitable device nearby to access the internet), within a matter of minutes you can come to terms with specific issues such as assessable income, deductions, superannuation and business structures, to name a few. And, if you’re cramming for an exam or you’re not sure about a particular issue, Tax for Australians For Dummies can quickly steer you in the right direction — and save you much time and heartache!

Part 1

How You’re Taxed in Australia

IN THIS PART …

Figure out the formula used in Australian income tax law.

Find out how Australian residents are taxed differently from non-residents and why it’s so important that you’re aware of your residential status.

Discover the different types of tax returns and which ones you need to lodge.

Understand what happens if your tax affairs are audited.

Chapter 1

Understanding the Australian Tax System

IN THIS CHAPTER

Breaking down the tax system

Progressing through the tax rates and rules

Determining sources of income

Paying tax if you’re a company

If you find tax a — excuse the pun — taxing subject, you’re not alone. Most people are confused by taxes and, of course, would rather not pay them. However, we all know the cliché: Death and taxes are the only sure things in life. So, put another way, you probably need to take some time to understand taxation.

This chapter goes over some basic info that you need to understand in order to lodge your tax return in Australia. I explain the basics of the Australian tax system, tell you how to work out sources of income, and examine what tax you need to pay if you’re setting up as a company.

Explaining the Australian Tax System

In Australia, two income tax assessment Acts are used by the federal government to levy tax on taxable income. They’re equivalent in size to four telephone books and are the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997. (The reason for two Acts is because the 1936 Tax Act is gradually being replaced with the more user-friendly 1997 Tax Act.)

TAXING MATTERS: HOW IT ALL BEGAN

In 1915, the Fisher Government introduced an Act to impose a tax on income from personal exertion, income from property and company profits. The major reason given was to help fund Australia’s involvement in the Great War. However, after you let such a genie out of the bottle, stopping a politician from continually dipping a hand in your wallet or purse is nigh impossible. The federal government has since introduced three additional taxes — capital gains tax (CGT, introduced in 1985), fringe benefits tax (FBT, 1986) and the goods and services tax (GST, 2000). When you come to think about it, the federal government has just about covered every conceivable way you can be taxed. The only thing it hasn’t done is tax the air you breathe. But, wait on, hold your breath … I’m quite sure some diligent bureaucrat in Canberra is currently examining this possibility!

Understanding Your Income Tax Rates

For resident individuals, tax is levied on worldwide income on a progressive basis, referred to as marginal tax rates. Your marginal tax rate can vary between 0 per cent and 45 per cent (marginal tax rates are detailed in Chapter 5). This rating system means the more income you earn, the greater the amount of tax you’re liable to pay.

Australia has numerous federal, state and territory, and local government taxes that you need to deal with.

The Australian Taxation Office (Tax Office or commonly abbreviated to just ATO) is the federal government authority responsible for administering Australia’s tax laws. To help you meet your legal requirements, the Tax Office regularly issues free-of-charge fact sheets, income tax rulings, tax determinations and interpretative decisions to explain tax issues that need clarification. You can access these fact sheets and tax rulings by visiting the Tax Office’s website (www.ato.gov.au). I reference many of these useful resources through this book too!

If you want to quickly know your tax obligations in a nutshell, visit the Tax Office website (www.ato.gov.au) and check out ‘Tax in Australia: what you need to know’. See also ‘Australian business taxes’ on the Australian Trade and Investment Commission website (globalaustralia.gov.au).

Federal taxes

The most important federal taxes include the following:

Capital gains tax

(CGT) is paid on gains you make when you sell assets you own and on the occurrence of certain CGT events. Your main residence is exempt from tax and some other concessions may potentially be available (see

Chapters 11

and

17

for more).

Customs duty

is paid on certain goods you import into Australia (for example, cameras, perfume, alcohol and cigarettes).

Excise duty

is levied on certain goods manufactured in Australia, such as alcohol and tobacco. (The hefty hike in excise duty on cigarettes is enough to make you quit smoking for good!)

Fringe benefits tax

(FBT) applies to certain benefits you may receive (for example, your employer provides you with a car for private use). See

Chapter 16

.

Fuel tax

is levied on petrol.

Goods and services tax

(GST) is applied to most purchases and sales. See

Chapter 15

.

Income tax

is paid on income you derive from worldwide sources. See

Chapters 5

to

7

.

The

Medicare levy

is used to help fund the Australian health system. The rate is 2 per cent of your taxable income.

Withholding tax

is paid on certain income derived by a non-resident (see

Appendix A

).

In the 2023–24 tax year, if you earned below $24,276 as an individual or $40,939 as a couple/family, you were exempt from paying the Medicare levy. Note: For each dependent child, the family threshold increases by $3,760. For single seniors and pensioners, the threshold is $38,365 and for families it’s $53,406.

If you don’t have private health insurance, you may be liable to pay a Medicare levy surcharge (MLS) if you earn more than a certain amount. For the 2023–24 tax year, the levy is 1.0 per cent if your taxable income (for the purposes of calculating your MLS) is between $93,001 and $108,000 for individuals or between $186,001 and $216,000 for couples/families. The MLS increases (in stages) to 1.5 per cent if you’re an individual earning more than $144,001, or couples/families earning more than $288,001. Note: The family threshold for the MLS increases by $1,500 for each dependent child after the first child. For more details see Tax Office fact sheet ‘Medicare levy surcharge income, thresholds and rates’ on the Tax Office website (www.ato.gov.au).

State and local taxes

Following are some of the taxes levied by states:

Gambling tax

is levied on certain gambling transactions (such as licence fees and poker machines).

Land tax

is paid on some property holdings.

Payroll tax

is levied on wages and fringe benefits an employer pays employees.

Stamp duty

applies to certain transactions, particularly when you buy a property.

In a local context, property valuation and rates charges fund local government services (such as rubbish collection).

Taxing Major Income Streams

Income is normally derived from three major sources:

Income from personal exertion, such as salary and wages, bonuses and commissions you earn as an employee, and any allowances you receive (see

Chapter 5

)

Income from property and investments, such as interest, dividends, rent, annuities and royalty payments (see

Chapters 8

to

10

)

Income from carrying on (or running) a business, such as profits you earn from your business activities (see

Chapter 12

)

Taxing your treasures: CGT assets

You may be liable to pay capital gains tax (CGT) on profits you make when you sell CGT assets such as shares, real estate and collectables. However, just 50 per cent of the capital gain you make is liable to tax if you own the CGT asset for more than 12 months. This concept is discussed in more detail in Chapter 11.

Under the CGT provisions, your main residence is exempt from tax. If you’re temporarily absent from Australia, the good news is your main residence continues to be exempt for an indefinite period if the property isn’t used to earn assessable income. Alternatively, if you lease the property while you’re away, your main residence is exempt from tax for up to six years (for more details, see Chapter 6).

Bringing home the money: International sources of income

As an Australian resident, you’re required to disclose income you earn from worldwide sources, and non-residents are required to disclose income that only has an Australian source. Unfortunately, the tax Acts don’t provide a statutory definition of source. So it basically boils down to a ‘practical hard matter of fact’. Generally, three key tests are used to determine the origin or ‘source’ of income:

The place where you perform the services

The place where you sign the contract to perform those services

The place of the payment

CHECKING YOUR RESIDENCY STATUS

Your residency status determines the amount of tax you’re liable to pay, because different tax rules and tax rates apply to residents and non-residents.

A resident of Australia is a person who normally lives in Australia and has a permanent home and job in Australia (commonly known as the residency test). In most cases, determining residency is relatively straightforward (for instance, you’re physically present in Australia for 183 days of the tax year or more). But this determination can become a little cloudy if you’re absent from Australia for a long time and you still maintain some ‘continuity of association’ with Australia.

Your personal circumstances can change from year to year, so a number of tests may be used to check whether you’re a resident. The main tests are

Do you intend to live in Australia?Are you physically present in Australia?How long do you stay in Australia each financial year?Do you have a family home in Australia?Do you have business and family ties in Australia?Are your personal assets located in Australia?

As a general rule, if you’re out of the country for more than two years and you sever your economic and social ties with Australia (for example, you quit your job and your family goes with you), you’re most likely going to be treated as a non-resident for income tax purposes (for more details see Tax Office fact sheet ‘Residency — the domicile test’ on the Tax Office website (www.ato.gov.au)). Of course, after you leave Australia, you can still change your mind and come back in the future. On the other hand, if you migrate to Australia, you’re generally considered a local for tax purposes from the date of your arrival, which means you’re taxed as a resident from day one, and you gain all the tax concessions available to residents.

If you become a resident of Australia part way during the financial year, you can’t claim the full tax-free threshold. (The tax-free threshold is the maximum amount of income you can receive that isn’t taxed — see Chapter 5.) You need to pro rata the amount. You can claim one-twelfth of the amount for each month you’re in Australia including the month you arrive. For example, if you arrive in Australia on 13 October 2023, at the time of writing your tax-free threshold is $13,650 ($18,200 / 12 × 9 months).

The Tax Office has published Taxation Ruling ‘TR 98/17’ regarding the residency status of certain individuals entering Australia (such as migrants, academics, students studying in Australia, visitors on holiday and workers with prearranged employment contracts). You can download a copy from the Tax Office website (www.ato.gov.au).

Ordinarily, your source of income is where you perform the services. For example, if you earn salary and wages, the source of income is the place where you perform the work, while the source of business profits is where you carry on the business activities.

If you’re a resident of Australia deriving foreign employment income such as salary and wages, you need to include the amount you earn overseas in your Australian tax return and pay tax here. If you pay foreign tax while working overseas, you can claim a foreign income tax offset in respect of the foreign tax that you pay. However, this rule harbours an exception. Foreign employment income derived by charity workers, the military and police, and people working on approved projects of national importance is exempt from tax in Australia. This exemption applies on the proviso that you work overseas for more than 90 days and you’re liable to pay foreign tax on the income you earn. If you don’t pay tax on income you earn overseas, the bad news is you have to include it in your Australian tax return and pay tax here. Unfortunately, you can’t win all the time!

If you want more info about foreign employment income visit the Tax Office website (www.ato.gov.au) and check out Tax Office fact sheets ‘Exempt income from foreign service’, ‘Working on an approved overseas project’ and ‘Australian resident foreign and worldwide income’.

If you earn foreign income such as dividends, interest and royalties, and withholding tax is deducted from the payment, you need to include both the foreign income and withholding tax as part of your assessable income, and you can ordinarily claim a foreign tax credit for the foreign tax you pay. You need documentary evidence to substantiate your claim for a foreign tax credit (for example, notice of assessment and receipt of payment). For more details visit the Tax Office website (www.ato.gov.au) and check out the fact sheet ‘Foreign and worldwide income’.

The Tax Office has issued Taxpayer Alert ‘TA 2012/1 Non-disclosure of foreign source income by Australian tax residents’ warning Australian resident taxpayers of their obligations to disclose their worldwide income. You can get a copy from the Tax Office website (www.ato.gov.au).

Taxing a Company

A company is a separate legal entity. It must apply for a tax file number (see Chapter 13) and lodge a company tax return at the end of the financial year, disclosing the company’s taxable net income or loss (see Chapter 3). Companies with an annual aggregated turnover (sales) of more than $50 million are liable to pay a 30 per cent flat rate of tax on taxable net income (derived). The rate reduces to 25 per cent for small or medium size business companies with an annual aggregated turnover (sales) of up to $50 million. The good news is that a company isn’t liable to pay a 2 per cent Medicare levy. By the way, if you want to be a company director, you’ll need to apply for a ‘Director Identification Number’. (See the Australian Business Registry Services website — abrs.gov.au — for more details.)

If a company derives predominantly passive investment income (such as interest, dividends, rent, royalties and net capital gains), it could be liable to pay a 30 per cent rate of tax. This could arise if more than 80 per cent of its assessable income is passive investment income.

A company can also be a resident or non-resident of Australia. Under Australian income tax law, a company is a resident of Australia if it incorporates in Australia. If this scenario isn’t the case, a company can still be a resident for tax purposes if

It runs a business in Australia.

Its central management and control is in Australia.

Its voting power is controlled by shareholders who are residents of Australia.

A company’s central management and control is usually where the company directors ordinarily meet to manage and run the company’s ongoing business operations, and make the big decisions regarding the company’s general policies and transactions it will enter. (For more info, check out Tax office fact sheet ‘Working out your residency’ and more particularly the bit relating to companies) and Taxation Ruling ‘TR 2018/5 Income tax: central management and control test of residency’. In Chapter 12, I guide you through choosing a company structure. Chapters 13 to 17 go into the tax issues that arise when running a small business, covering GST, FBT and CGT.

Chapter 2

Taxing Australians: The Formula You Need to Know

IN THIS CHAPTER

Understanding the tax formula

Identifying assessable income

Working out exempt income

Dissecting the general deduction provisions

Including possible tax offsets

Income tax law is like doing a jigsaw puzzle: You need to figure out where all the bits and pieces fit together. The Australian tax system uses a tax formula to work out whether you’re liable to pay tax or get a tax refund. The tricky part is coming to terms with all the rules and regulations that you need to obey.

In this chapter, I guide you through the key components that make up the tax formula and explain the statutory regulations you need to follow.

Doing Your Sums

Tax is levied on taxable income. At the end of each financial year (which commences on 1 July and ends on 30 June), Australian residents are required to disclose the taxable income they derive from all sources in and out of Australia. (Non-residents are required to disclose only taxable income they derive from sources in Australia — refer to Chapter 1 and Appendix A for more.)

The Australian tax system uses the following tax formula to calculate your taxable income:

Assessable income minus allowable deductions equals taxable income

The system then sets out the rules you need to follow to determine your taxable income. Figure 2-1 shows an overview of the various elements that make up this tax formula.

FIGURE 2-1: Charting the tax formula.

Declaring What You Earn: Assessable Income

Assessable income is income that you’re liable to pay Australian income tax on. Assessable income is a combination of two key components: Ordinary income and statutory income.

You’re considered by the Tax Office to have derived (earned) assessable income when you receive a payment or when you can legally demand payment for the services you’ve provided. The following classes of assessable income are considered to have been derived when they’re paid to you:

Business profits (if you use the cash or receipts basis to recognise your income — for more details see

Chapter 13

)

Dividends (see

Chapter 9

)

Interest (see

Chapter 8

)

Rent (see

Chapter 10

)

Salary and wages and directors fees (see

Chapter 5

)

You’re liable to pay tax only on assessable income you derived during the year of income. This liability means that payments you haven’t earned aren’t taxed. You’re considered to have derived or earned the amount as soon as you instruct someone as to how the income should be applied on your behalf (for instance, you instruct your employer to pay a bill on your behalf rather than giving the income to you).

If you run a business and use the accruals or earnings basis to recognise your income, you’re considered to have derived your business profits when you have a legal right to demand payment — for instance, at point of sale. (See Chapter 13 for more.) Further, if you receive a payment before providing the services, you’re considered to have derived this amount when the services have been completed.

If you receive a compensation payment for loss of income, the amount you receive is ordinarily treated as assessable income. For example, one of your clients compensates you for loss of business profits due to the cancellation of a commercial contract you entered into in the ordinary course of running your business.

The Tax Office provides fact sheets and tax rulings to help you understand the meaning of assessable income. The main ones (‘Assessable income for business’ and ‘Income you must declare’) are available from the Tax Office website (www.ato.gov.au).

A payment you receive can be capital or income in nature. Capital is often likened to a fruit tree (such as a rental property or business premises that you own), while income is the fruit that the tree produces (such as rent you receive from your rental property or business profits you derive from your business premises). A capital receipt (such as a capital gain you make on sale of your rental property or business premises) is ordinarily liable to tax under the capital gains tax (CGT) provisions. (Check out Chapter 11 for more on CGT.)

Ordinary income

Ordinary income can cover a broad category of potential receipts. The Tax Act doesn’t tell you what ordinary income means, so you need to follow the general principles associated with identifying the characteristics of ordinary income.

Ordinary income is generally divided into three categories:

Income from personal exertion:

Particularly salary and wages, tips, bonuses and commissions you earn as an employee, and any allowances you receive. Income derived from this source is taxed at your marginal tax rates (see

Chapter 5

). If you’re a resident of Australia, you may qualify for certain domestic tax offsets (rebates).

Income from property:

Such as interest, dividends, rent, annuities and royalty payments. If you’re a resident of Australia, income derived from this source is taxed at your marginal tax rates. Further, if you receive a dividend, you may qualify for a dividend franking credit tax offset (see

Chapter 9

). If you’re a non-resident, certain payments you receive (for instance, interest and dividends) are liable only to withholding tax (see

Appendix A

).

Proceeds from carrying on (running) a business:

This includes the profits you earn from your business activities. Income earned from this source is taxed at your marginal tax rates. However, if you run a small- or medium-size business in a company structure, you pay a 25 per cent flat rate of tax if your company’s annual aggregated turnover (sales) does not exceed $50 million. (If your company’s annual aggregated turnover is more than $50 million, the tax rate is 30 per cent; see

Chapter 12

.)

For more info on ordinary income, check out the fact sheet ‘Assessable income’ available from the Tax Office website (www.ato.gov.au).

Assessable income, particularly ordinary income, can also arise from an isolated commercial transaction outside the scope of what you normally do for a living; for example, if you’re a fashion designer and decide to build a block of flats. This tax liability is on the proviso that the intention or purpose of entering into the transaction is to make a profit or gain. Any profit or gain you make is treated as assessable income. Conversely, if you make a loss, you can claim a tax deduction. Because this area of the law is complex, you’re best to seek advice from a registered tax agent or solicitor. (For more details, see the Tax Office’s Taxation Ruling ‘TR 92/3 Whether profits on isolated transactions are income’ and ‘TR 92/4 Whether losses on isolated transactions are deductible’ — these deal with profits and losses from isolated transactions.)

Statutory income

Statutory income is assessable income that’s liable to tax because it’s specifically listed in the Tax Act. This tax liability may arise, for example, if you make a net capital gain on the sale of a CGT asset or the occurrence of some other CGT event (see Chapter 11), or you receive a franking credit attached to a dividend (see Chapter 9).

Keeping What You Receive: Exempt Income

Not everything that comes your way has to be shared with the Tax Office — phew! Why? Because certain payments you may receive are exempt from tax. For example, you don’t have to pay tax if you receive regular maintenance payments from a former spouse, you’re a full-time student in receipt of a scholarship, or you receive certain government pensions or allowances (see Chapter 19). Other payments that are exempt from income tax include certain

Compensation payments

Defence force allowances (including payments and allowances from part-time service)

Educational assistance allowances

Family assistance allowances

Payments received from one or two students boarding with you under a homestay arrangement organised by the Department of Education (see ATO Interpretative Decision ID 2001/381 for more info)

The good news gets even better because certain organisations are also exempt from tax. These can include registered employer associations, non-profit societies for the encouragement of music, charitable institutions, non-profit sports clubs, public educational institutions and non-profit hospitals. Because these organisations don’t pay tax on income derived, more money is available to help fund their activities! For more info, check out the Tax Office instruction guide ‘Tax basics for non-profit organisations (NAT 7966)’. You can download a copy from the Tax Office website (www.ato.gov.au).

A number of specific payments are also exempt from tax, so you need to know which ones are assessable or exempt. As a general rule, exemption depends on why you received the payment. The confusing bit is that a payment can come from many different sources, for example:

An income-earning activity, such as employment or from running a business

An isolated commercial transaction with a view to making a profit or gain

Investment activities

Gifts from friends and relatives

A deceased estate

A hobby or pastime

A big win at the casino or races

Proceeds on the sale of CGT assets

It may be difficult to work out which of these payments are assessable or exempt. To make matters even more confusing, if the payment is a capital receipt, it can be liable to tax under the CGT provisions (see Chapter 11).

Income has the following characteristics:

Income is a periodical cash receipt (or benefit that can be converted into cash); it’s recurrent and regular and you rely upon it to meet your living costs (for example, pension payments).

Income usually arises if a sufficient connection exists between an income-earning activity and the payment (such as a salary or business profits). If a sufficient connection isn’t present, the receipt is most likely exempt from tax.

The following payments are examples of receipts that are normally exempt from tax because they fail the sufficient connection test:

Money you receive from windfall gains such as lottery, gambling and betting wins.

Personal gifts you receive from friends and relatives.

Pocket money you give to your children.

Proceeds from a hobby or pastime. However, if you’re getting $5,000 from selling your homegrown fruit and vegetables, for example, you may be liable to tax because you may be considered to be running a business if you’re doing this on a regular basis.

Money you inherit.

Certain compensation payments (such as for losing an eye or limb).

If you have a home-based hobby and you sell products or services online (for example, you collect postage stamps and you regularly buy and sell them on eBay) you need to know whether your activities are a hobby or a business. For more details visit the Tax Office website (www.ato.gov.au) and read fact sheet ‘Business or hobby’. Also check out fact sheet ‘Is your hobby a business?’ on the business.vic.gov.au website.

If you receive a non-cash benefit from a business relationship (for instance, you’re a motor mechanic and customers give you a tray of meat instead of cash for fixing their car), the value of the non-cash business benefit you receive is ordinarily brought to account as assessable income if the benefit exceeds $300 (otherwise, it’s exempt). For more info, check out Taxation Ruling ‘IT 2668 Income tax: barter and countertrade transactions’ on the Tax Office website (www.ato.gov.au).

If you like horse racing, regularly buy lotto tickets in the hope of hitting the jackpot, or play poker, I’ve got some good news for you! The proceeds from gambling and betting are normally exempt from tax, unless you can prove you’re running a business of gambling and betting. Before you start sending thank-you letters to the Tax Office, though, the reason the Tax Office isn’t keen to tax your winnings is because if it treats your activities as a business, any gambling and betting losses you incur become a tax-deductible expense. And, because losing generally trumps winning, the Tax Office isn’t eager to subsidise your bad habits!

Whether a sufficient connection exists to make gambling proceeds assessable is a question of fact. As a general rule, proving this connection to the Tax Office is extremely difficult because activities involving an element of chance are normally considered to be no more than a hobby or pastime and not a business. Unless you’re connected with the racing industry (for example, you’re a bookmaker, trainer or horse breeder), you’re unlikely to succeed in your attempt to convince the Tax Office.

If you want to know more about whether your horse-racing activities are a business or a hobby, check out Taxation Ruling ‘TR 2008/2 Horse racing, training and breeding activities’ on the Tax Office website (www.ato.gov.au).

Reducing Your Tax Bill: General Deductions

You must satisfy a number of conditions to claim a general deduction (referred to as the general deduction provisions). You can also claim certain specific deductions, which I talk about in Chapter 14.

The general deduction provisions set out the following rules for claiming a tax deduction. You can deduct from your assessable income any loss or outgoing to the extent that either

The loss or outgoing is incurred in gaining or producing your assessable income.

The loss or outgoing is necessarily incurred in carrying on (running) a business for the purpose of gaining or producing your assessable income.

However, be warned that you can’t deduct a loss or outgoing under the general deduction provisions to the extent that it’s

A loss or outgoing of capital, or of a capital nature.

A loss or outgoing of a private or domestic nature.

A provision of the Tax Act, which prevents you from deducting it.

When you examine the nuts and bolts that make up the general deduction provisions, two positive limbs allow you to claim a tax deduction and four negative limbs prevent you from claiming a tax deduction.

Further, you can claim a deduction only to the extent to which it’s incurred in gaining or producing your assessable income. This means you’re allowed to separate the parts of expenditure that may be partly allowable for deriving assessable income and partly not allowable because they’re private or domestic in nature. For example, this could arise if you use your car partly for the purposes of deriving assessable income (such as using your car for only two days a week to earn income). Under these circumstances, two-sevenths of your car expenses are deductible, while the balance would be private or domestic in nature. The general deduction provisions also point out you can only claim expenditure that has been incurred in gaining or producing assessable income.

To comply with the deduction part of the tax formula (refer to Figure 2-1), you need to come to terms with the following key concepts:

First positive limb

Second positive limb

The negative limbs

Meaning of incurred

Checking out the first leg: First positive limb

The first positive limb sets out the rules for claiming a tax deduction. It applies to individuals who derive personal exertion income, such as salary and wages, and income from property, such as interest, dividends and rent. (If you’re not running a business, you must rely only on the first limb to claim a tax deduction.)

The first positive limb points out that you can deduct from your assessable income any loss or outgoing to the extent that it’s incurred in gaining or producing your assessable income. To claim a tax deduction under this limb, you need to demonstrate that the loss or outgoing was incurred in the actual course of gaining or producing your assessable income, and that it must be incidental and relevant to that end. Further, for the expenditure to be deductible, a perceived connection between the expenditure and the gaining or producing of your assessable income must be shown to exist. The perceived connection is determined by examining the character of the expense.

To qualify for a tax deduction under the first positive limb:

A direct connection must exist between the expenditure and the derivation of your assessable income.

The expenditure must be incurred while you’re deriving your assessable income.

Examining the next leg: Second positive limb

To claim a tax deduction under the second positive limb, you need to demonstrate that you’re running a business. The deduction must be incurred in running a business for the purpose of gaining or producing your assessable income.

Check out Chapter 13 for a discussion about whether you’re actually running a business. Generally speaking, to qualify for a tax deduction under the second positive limb, the outgoing must be part of the cost of trading operations. This assessment depends on two key conditions:

The outgoing was necessarily incurred in running a business.

Running the business was for the purpose of gaining assessable income.

Following are examples of outgoings necessarily incurred in running a business:

Payments to secure the resignation of two managing directors, having proven to be unsatisfactory.

Expenses incurred by a company in defending its commercial reputation.

Being aware of the negatives: Negative limbs

The general deduction provisions of the Tax Act also tell you what loss or outgoing isn’t a tax-deductible expense. They point out you can’t deduct a loss or outgoing under this section if

The loss or outgoing is capital, or of a capital nature.

The loss or outgoing is of a private or domestic nature (for example, if you can’t show a sufficient connection with earning your assessable income).

A provision of the Tax Act prevents you from deducting it; certain expenses such as entertainment expenses and penalties are specifically not tax deductible (see

Chapter 14

).

The loss or outgoing is incurred in relation to gaining or producing exempt income.

Checking out what is capital in nature

Unfortunately, the area of the law concerning whether a loss or outgoing is capital, or of a capital nature, is very complex. Whether the expenditure is capital and not deductible, or tax deductible, can depend on a fine level of judgement. Generally, if an expense is designed to bring into existence a lasting or enduring benefit (such as getting a driver’s licence in order to get a job), or is a one-off payment (for example, purchasing your business premises), the expenditure is most likely to be capital in nature and not tax deductible.

Following are examples of the types of expenditure that Tax Office folk consider to be capital in nature and not tax deductible:

Undertaking a course of study that has no relevance to your current occupation (such as a motor mechanic studying accountancy; see

Chapter 5

).

Costs associated with trying to find employment. Why? Because these costs are incurred at a point too soon to be deductible.