Understanding Australian Tax System

Every individual, whether they have income or not, has to prepare and lodge the income tax every year. Here is a guide that will help you understand your reporting obligations and answer your queries regarding tax returns and tax brackets.

What is a tax return?

A tax return, at its core, is a form that one completes online, or on paper, or takes the help of an agent to report to the government how much income you made the following fiscal year and if you are asking for any claims on behalf of wrong deductions. The government then checks that information to find out if you have paid enough tax or paid too much of it. Additionally, the government also checks the documents to determine if you fall under the category of people who have to pay for the Medicare levy or surcharge.

If a person pays more tax than he needs to, the government, with due diligence, pays back the refundable amount to the rightful owner. On the other hand, if you haven’t paid enough tax for the year, the government issues a tax bill claiming what you owe to the government.

Do I need to lodge a tax return every year?

Filing tax returns is quite a dreaded subject, and most of the students, when they move to Australia, aren’t familiar with the country’s tax laws. As it is clear that international students can work part-time during their college year and even full-time during semester breaks, but with the duty comes the obligation. As the Australian government allows international students to work, this means that they have to pay tax on it too. A non-native student, too, has to pay the rightful share of his income to the authorities.

Additionally, international students aren’t aware that if they didn’t work for the entire fiscal year, they don’t need to pay taxes. If an international student hasn’t earned more than $18,200 for the entire financial year, he doesn’t have any obligation to pay income tax. However, if you still paid the tax, you can apply for a refund even if you didn’t meet the criteria. The most crucial thing worth mentioning here is that if you fall below the threshold of $18,200, you have to provide non-lodgment advice to the ATO, informing them that you will not be filing tax for the past year. It is necessary to do so to avoid getting marked down and the penalties that come with it. In saying that, you still need to lodge a tax return even if you have not worked the entire financial year but you do not have to pay tax.

What is TFN, and how to apply for it?

TFN, at its core, is basically a tax file number. It is totally free and is basically an identification number used by the government for taxation and superannuation purposes. A unique TFN is allotted to an individual for a lifetime. Even if you go overseas, switch between jobs, or change your name, the TFN stays the same. However, you need to inform the authorities about these changes. If you want to apply for a TFN, there are relevant processes for each case. Such as;

  • International students, foreign nationals and visitors – You can check how to apply and other details here.

  • Australian nationals (People who have been born in Australia or carry Australian citizenship) – You can check how to apply and other details here.

  • People who live outside Australia but have a source of income in Australia. These people need a TFN to claim the refund. You can check how to apply and other details here.

However, if you still have queries regarding your status of residency, you can click here.

What is meant by “resident for tax purpose?”

You can give a residency test to better understand whether you are an Australian resident for tax purposes or a foreign resident for the purpose of tax. Even if you are an international student, you are still considered an Australian resident for tax purposes. According to the ATO “If you’re enrolled to study in Australia in a course that lasts for six months or more, you may be regarded as an Australian resident for tax purposes. This means:

  1. you pay tax on your earnings at the same rate as other residents,
  2. you’re entitled to the benefits of the Australian tax system, such as
  • the tax-free threshold (or part of it, if you’re here for only part of the financial year),
  • tax offsets and
  • generally lower tax rates than a foreign resident”.

How much do I need to pay?

The rate and amount of tax payable are different for every person. The income tax rates mentioned below show the amount of tax payable depending upon your circumstances.

If you are a resident for tax purposes, here is a chart depicting the amount of tax that you need to pay for the year.

Taxable income

Tax on this income

0 – $18,200

Nil

$18,201 – $45,000

19 cents for each $1 over $18,200

$45,001 – $120,000

$5,092 plus 32.5 cents for each $1 over $45,000

$120,001 – $180,000

$29,467 plus 37 cents for each $1 over $120,000

$180,001 and over

$51,667 plus 45 cents for each $1 over $180,000

Keep in mind that these rates do not include the Medicare levy of 2%.

If you are a foreign resident for tax purposes, the applicable tax on you is depicted in the column below.

Taxable income

Tax on this income

0 – $120,000

32.5 cents for each $1

$120,001 – $180,000

$39,000 plus 37 cents for each $1 over $120,000

$180,001 and over

$61,200 plus 45 cents for each $1 over $180,000

How much will be deducted from my pay?

If you want to get familiar with how much money your employer has to deduct from your salary, use the tax withheld calculator.

Additionally, if you are a child and are under the age of 18 and receive the unearned income, special rates apply to those too.

What is superannuation, and how does it help?

The term super refers to your future. The savings that you do today and the superannuation choices you make today help you shape your retirement life in the future. If you want to maximize your super savings after retirement, you need to save more now. Superannuation has been made compulsory by the government in 1992 to help the people after their retirement. Click here for a more thorough look into the topic. Start saving now to secure your future.

What is the Medicare levy, and why do I have to pay?

Medicare is the public healthcare system that the Australian government has taken to fund the costs of the Australian health system. The best thing about this is that you just have to pay 2% of your taxable income in addition to the tax that you are paying to the government. Depending upon your and your spouse’s financial condition, you can get an exemption from paying this liability. However, you need to be eligible for that. If you need to find out how much you have to pay in the name of the Medicare levy, click here. It will hardly take two minutes.

How can students get Medicare tax exemption because they do not benefit from Medicare and already have a private health cover?

There are certain conditions in which you might get an exemption from paying the Medicare levy. These conditions include;

  • If you meet the medical requirements criteria

  • If you are a foreign resident and/or are staying in Australia for a short time.

  • If you aren’t going to benefit from Medicare in the near or far future.

However, if you are eligible for an exemption, you might need to claim the deducted amount through your tax return.

Additionally, if you are a foreign student, you aren’t required to pay Medicare Levy. Although irrespective of the nationality, whether national or foreign, a student has to get a Medicare Levy Exemption Certificate to get an exemption from the Medicare Levy charges.

Conclusion

Lodging a tax return is the duty of every person who works in Australia, irrespective of the country of birth or nationality if you want to avoid any lawsuits or Government penalties. The tax that you pay goes to many places, including the salaries of government workers, and helps in supporting common resources, such as firefighters and police. The tax that you pay makes sure that your roads are safe for travelling and well maintained. On top of that, the money that you pay helps in funding libraries, parks, Government infrastructures and public infrastructures.

Disclaimer: This video is meant to give basic tips about the Australian Tax System. For professional suggestions, you must either contact ATO or a registered tax agent.

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