Income tax

An introduction to Australia´s income tax

Federal income tax is levied under a two-tier system: the First Class system applies to the self-employed and companies, and the Second Class system, called Pay-As-You-Go (PAYG), is for employees.

The self-employed pay their tax in arrears, whereas an employee’s income tax is deducted at source from his salary by his employer. There’s no state income tax in Australia, although it may be introduced under wide-ranging tax reforms currently under consideration. The income tax year in Australia runs from 1st July to 30th June of the following year (for reasons known only to the tax office).

Tax is calculated on taxable income derived during the income tax year, although in certain circumstances a substitute accounting year beginning on a different date may be used. Changes in federal taxation are usually announced in the annual budget in May. Australian income tax law recognises the following general types of taxpayer: companies, individuals, partnerships and trusts. Specific provisions apply to insurance companies, mining operations, minors, primary producers, superannuation funds and certain other businesses.

Domicile

Residents of Australia are taxed on their worldwide income and non-residents only on Australian income. You’re considered to be resident in Australia for tax purposes if any of the following applies:

You normally reside in Australia.
You’re domiciled in Australia and don’t have a permanent place of abode outside the country.
You spend at least 183 days per financial year in Australia (unless you don’t intend to take up Australian residence and have a usual place of abode outside Australia).

Double-taxation Agreements

Despite their name, double-taxation agreements are designed to prevent you paying taxes twice! Under double-taxation agreements, certain categories of foreign resident are exempt from paying Australian tax. Australia has double-taxation agreements with many countries, including Argentina, Austria, Belgium, Canada, China, the Czech Republic, Denmark, Fiji, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Italy, Japan, Kiribati, the Republic of Korea, Malaysia, Malta, the Netherlands, New Zealand, Norway, Papua New Guinea, the Philippines, Poland, Romania, Singapore, the Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, the UK, the US and Vietnam. If part of your income is taxed overseas in a country with a double-taxation treaty with Australia, you won’t be required to pay Australian tax on that income.

Foreign employees working in Australia for Australian companies or organisations are subject to Australian tax on their earnings. However, if your stay is less than six months, you’re usually taxed at the (higher) rates applicable to non-residents, although double-taxation agreements contain particular articles dealing with directors, entertainers, government services, professors and teachers, which may alter this position. Salary and wage income earned by residents from services performed overseas is exempt if you’ve been employed outside Australia for a continuous period of at least 91 days, provided the income has been taxed overseas.