If you take the time to understand taxes, you could end up paying significantly less tax each year, save a considerable amount of time when compiling your tax returns, avoid making costly mistakes, and generally have a better relationship with the ATO (Australian Taxation Office). Let’s explore how Australian tax brackets work for individuals and businesses to get you set up for success.
Tax bracket basics
Tax brackets, or marginal tax rates, are part of a progressive taxation system that’s used in most developed economies, not just in Australian tax brackets. The basic idea is that low-income earners pay the least amount of tax, and as you earn a higher income, you start to pay more in tax.
What are the Australian tax brackets?
|Annual Earnings||Tax Rate||Explanation|
|$0 – 18,200||0%||You’ll pay no income tax|
|$18,201 – 37,000||19%||You’ll be taxed 19% on all income above $18,200|
|$37,001 – 90,000||32.5%||You’ll be taxed 19% on all income from $18,201 to $32,000, and 32.5% on all income above $37,000|
|$90,01 – 180,000||37%||You’ll be taxed 19% on all income from $18,201 to $37,000, 32.5% on all income from $37,001 to 90,000, and 37% on all income from $90,01 to $180,000|
|$180,001 +||45%||You’ll be taxed 19% on all income from $18,201 to $37,000, 32.5% on all income from $37,001 to 90,000, 37% on all income from $90,01 to $180,000, and 45% on all income above $180,001|
Examples of how this would look in practice
Let’s now take three imaginary people across a range of income brackets and look at how much tax they’d end up paying.
Bob (low/middle-income earner)
Bob earns $32,000 per year as a retail assistant. Therefore, he’d be taxed nothing on all his income up to $18,200, and 19% on all income above this figure.
Taxable income: $32,000 – $18,001 = $13,999
Total tax owed: 19% of $13,999 (13,999 × 0.19) = $2,659.81
Julia (middle-income earner)
Julie earns $70,000 as a teacher. She’d be taxed nothing on her income up to $18,200, 19% on all income from $18,201 to $37,000, and 32.5% on all income above $37,001.
Income taxable at 19%: $37,000 – $18,201 = $18,799
Tax owed at this tax bracket: 19% of 18,799 (18,799 × 0.19) = $3,571.81
Income taxable at 32.5%: $70,000 – $37,001 = $32,999
Tax owed at this bracket: 32.5% of$32,999 (32,999 × 0.325) = $10,724.68
Total tax owed: $3,571.81 + $10,724.68 = $14,296.49
Stephanie (high-income earner)
Stephanie earns $200,000 as an asset manager. She’d be taxed nothing on her income up to $18,200, 19% on all income from $18,201 to $37,000, 32.5% on all income from $37,001 to $90,000, 37.5% on all income from $90,001 to $180,000, and 45% on all income over $180,001.
Income taxable at 19%: $37,000 – $18,201 = $18,799
Tax owed at this tax bracket: 19% of18,799 (18,799 × 0.19) = $3,571.81
Income taxable at 32.5%: $90,000 – $37,001 = $52,999
Tax owed at this tax bracket: 32.5% of $52,999 (52,999 × 0.325) = $17,224.68
Income taxable at 37.5%: $180,000 – $90,001 = $89,999
Tax owed at this tax bracket: 37.5% of $89,999 (89,999 × 0.375) = $33,749.63
Income taxable at 45%: $200,000 – $180,001 = $19,999
Tax owed at this tax bracket: 45% of $19,999 (19,999 × 0.45) = $8,999.55
Total tax owed: $3,571.81 + $17,224.68 + $33,749.63 + $8,999.55 = $63,545.67
Hopefully this has gone some way to helping you work out how income tax works in practice. However, if you want to work out your own personal income tax rates, there’s no need to get your calculator out — instead, use a simple online tax calculator.
Other types of personal tax to be aware of
The tax brackets listed above only apply to your assessable income, which refers to three things: your personal earnings, business income, and capital gains. Don’t worry — we’ll delve into each of these in more depth later on. However, as well as income tax, there are certain other taxes that you also need to be aware of.
Australia’s public health service is partly funded by taxpayers, through a tax known as the Medicare levy. It’s currently set at 2%, though individuals earning more than $90,000 and families earning above $180,000 are eligible for a surcharge ranging from an additional 1-1.5% of their taxable income.
Everybody is obliged to pay the Medicare levy unless you’re a senior citizen, earn a wage below $22,398 per year, are a foreign resident, or meet certain medical requirements.
GST (goods and services tax)
Goods and services tax is a flat-rate tax applied to any goods or services that are sold. In fact, you might not even know it exists — it’s usually included in the price of whatever you’re buying (at a rate of 10%).
However, it’s a must-know for all businesses with a turnover of $75,000 or more. So, if you fall into that category, make sure you understand the GST rules and regulations set by the ATO.
CGT (capital gains tax)
Capital gains tax applies whenever you sell an asset, such as real estate or shares in a company. Imagine you decide to sell a share for more than you bought it — in this case, you’d pay capital gains tax on the profit that you made.
CGT falls under regular income tax/assessable income. For that reason, there’s no capital gains tax rate as such. Instead, any profit you make is included in your overall assessable income — and you’re then taxed according to whichever marginal rate you fall under.
But, it’s worth highlighting that the amount of capital gains tax you need to pay is reduced by 50% if you were in possession of the asset for over a year.
What’s the Australian corporation tax rate?
Of course, personal income tax might not be the only form of taxation that you need to be aware of. There were 2.3 million Australian businesses as of February 2019, and this figure could well have increased over the last year.
Each of these businesses is responsible for paying its fair share of corporation tax. Needless to say, many outsource this to their accountants — after all, it’s an accountant’s job to know about the ins and outs of Australian tax law.
But that doesn’t mean that business owners (even those just starting out) can remain oblivious to the details. Do you consult your accountant before purchasing anything for the business? Probably not — it goes without saying that accountants won’t always be on hand to give you the green light whenever you want to restock the stationery cupboard or refurbish the office.
However, an ill-timed purchase (or one that’s simply too expensive) might risk leaving you to fall foul of the ATO. It’s important that you’re always aware of your company tax rate — in other words, the amount of tax that your company owes — as it’s one major expense that you’re always going to have to take into account.
So let’s look at the details. Here in Australia, corporation tax rates are as follows:
- All companies with an aggregate turnover of $50 million: 30% of all taxable income (in other words, total profit or assets that the ATO hasn’t deemed tax exempt add up to a value of over $50 million)
- Companies with an aggregate turnover of less than $50 million (also known as base rate entities): 27.5% of all taxable income
Aggregate turnover (for tax purposes) refers to the total turnover of all your business’s connected entities. For instance, if you’re a small business that’s a subsidiary of a larger parent company, then your turnover would be combined with the parent company’s when calculating your taxable income.
In order to qualify for the reduced tax rate (for base rate entities), no more than 80% of a company’s total assessable income can be defined as passive income.
But, what does base-rate-entity passive income mean in this context?
Well, according to the new section 23AB of the ITR (income tax rates) Act, base rate entity passive income can include the following:
- Franking credits (dividends paid out to shareholders which are exempt from that individual’s assessable income)
- Interest, royalties, and rent
- A gain on a qualifying security
- A net capital gain
But, the ATO plans on further reducing the amount of corporation tax that base rate entities have to pay over the following few years. For the 2020-21 tax year, base rate entities will be obliged to pay the ATO 26% of their taxable income, with this falling to 25% for the 2021-22 tax year.
Are there any other types of corporation tax?
If your company has any employees earning above $450 per month (and who are over the age of 18), then you’ll also need to pay superannuation.
According to the ATO, superannuation (a.k.a. super) is ‘money put aside by your employer over your working life for you to live on when you retire from work.’
The super rate is currently set at 9.5% — that’s to say, employers have to put aside $9.50 for every $100 that their employees earn.Superannuation guarantee contributionsare going to be increased to 10% as of July 1st, 2021.
Mastering your taxes and making nice with the ATO
We hope that you’ve found this guide useful and that it’s answered any questions you might’ve had about tax brackets in general, as well as how Australian income tax works for both individuals and businesses.
Now it’s up to you. Go out there and use all available tools to start making the tax system work for you, fostering a great working relationship with the ATO in the process.