Tax Studio Tax Basics
How the Australian Taxation System Works
If you’ve ever looked at a payslip or a BAS form and wondered where all the numbers come from, this is the plain-English version. Here’s how tax actually works in Australia, from the financial year to the ATO to the difference between income tax, GST and superannuation.
Who runs the system
The Australian Taxation System is administered by the Australian Taxation Office, better known as the ATO. It collects tax, pays out refunds and benefits, and enforces compliance. The government sets the rates and rules through legislation, and the ATO applies them.
Australia runs on a financial year rather than a calendar year. The tax year runs from 1 July to 30 June, which is why most tax deadlines and rate changes land around those dates rather than 1 January.
Individual income tax
Individual income tax is progressive. That means you don’t pay one flat rate on everything you earn, you pay increasing rates on each slice of income as you move up through the brackets. Earn under the tax-free threshold and you pay no income tax at all. Every dollar above that is taxed at the rate for whichever bracket it falls into, not your whole income at the top rate.
Tax brackets and rates change from time to time in the Federal Budget, so treat the table above as the shape of the system rather than fixed numbers. We’ll always confirm the current rates and thresholds that apply to your return.
On top of income tax, most taxpayers also pay the Medicare levy, a small percentage of taxable income that helps fund Australia’s public health system. Some people are eligible for a reduction or exemption depending on their income and circumstances.
GST and BAS for business
The Goods and Services Tax, GST, is a broad tax added to most sales of goods and services in Australia. Businesses registered for GST collect it from customers and remit it to the ATO, claiming back the GST they’ve paid on business expenses along the way.
If your business turnover crosses the GST registration threshold, registration becomes compulsory. Once registered, you report and pay GST through a Business Activity Statement, or BAS, usually every quarter, though some businesses lodge monthly or annually depending on their circumstances.
A BAS isn’t just about GST. It’s also where most businesses report PAYG withholding (tax withheld from employees’ wages) and PAYG instalments (prepayments toward the business’s own income tax bill).
Company tax and superannuation
Companies pay tax at a flat company tax rate rather than the progressive individual scale, with a lower rate generally available to smaller businesses under a certain turnover. Sole traders and partnerships, by contrast, have their business income taxed as part of the individual owner’s personal return, at individual rates.
Superannuation is Australia’s compulsory retirement savings system. Employers are required to pay a percentage of an employee’s ordinary earnings, the Superannuation Guarantee, into a super fund on their behalf. That rate has been progressively increasing in recent years, so it’s worth checking the current rate rather than assuming an old figure still applies.
Key dates worth knowing
Individuals who lodge their own tax return generally have until 31 October after the end of the financial year. Lodge through a registered tax agent, like Tax Studio, and that deadline is usually extended, sometimes well into the following year, as long as you’re on our books before the October date.
Businesses lodging BAS quarterly work to the ATO’s quarterly due dates, generally the 28th of the month following each quarter, with a short extension often available when lodging through a registered agent.
Want this handled for you, not just explained?
That’s exactly what a registered tax agent is for. Book a free consult and we’ll take the tax system off your plate.