The Australian tax system is overseen by three tiers of government and consists of five different categories of tax. All taxes in Australia are collected for the benefit of Federal, State and Local Governments and the powers to collect them vests within the Constitution and the subsequent Acts of Parliament.
Income tax is the sole jurisdiction of the Federal Government under section 51 of the Constitution and is levied on individuals, companies and trusts. Individuals who earn more than $6,000 in any income year must file a tax return. The income of individuals who have obtained a tax file number is taxed under a progressive tax system, which meant that the rate of tax increases as with an individuals level of income. Currently the highest marginal tax rate for individuals is 45% plus 1.5% Medicare Levy. This rate of tax only applies to the income of individuals that exceeds $180,000 in a given year.
Companies are also liable for income tax, but are taxed at a flat rate of 30% which represents a proportional tax system. Most trusts are taxed at the highest marginal rate for individuals, unless the income is distributed to another entity. The exception to this is self managed super funds which are taxed at a flat rate of 15%.
Consumption tax is levied on the purchase of goods and services that are consumed by individuals. In Australia, the consumption tax is known as the Goods and Services Tax or GST and is levied by the Federal Government. The GST is levied on all goods and services sold within Australia and consumed by individuals. When a business consumes a good or service in order to produce another good or service, the business is entitled to a tax credit for the GST paid. This is because the system is designed to tax output rather than inputs. GST in Australia is currently fixed at 10% of the sale price of any good or service.
Acquisition tax applies to purchases of property and is commonly known as Stamp Duty. Stamp duty is levied by the State Governments and is a progressive tax that can range from 1.25% for apurchases under $14,000 to 7% for purchases over $3,000,000. Stamp duty will also apply in some states to unlisted shares; cars; and creation of trusts; however the Federal Government has put pressure on the States over the last decade to phase these taxes out and rely on the GST for tax revenue.
Holding tax is levied on the holding of property and comes in the form of land tax and council rates. Land tax is levied by the State Governments and will apply to any real property that you have that is not your main residence. Land tax in NSW is levied once a year on the 31st of December at a rate of 1.6% of the taxable land value between $408,000 and $2,421,000; and 2% thereafter. Council rates are another form of holding tax, and they are levied on residential and commercial dwellings by local governments to pay for local services such as waste removal, local road works and community services. Council rates are tied to a dwelling’s taxable land value and the rate will depend on which local government area the dwelling is located in.
Disposal tax is levied on the the gain obtained by the sale of an appreciating asset. This is most commonly known in Australia as capital gains tax and it applies to most assets, including real property, except when the real property is a person’s main residence. Capital gains tax is not in itself a separate tax, but is actually a liability to be taxed. Capital gains are included in a taxpayer’s assessable income, and will ultimately be taxed at their marginal rate.