How much do you know about income tax?

The tax-free threshold is set by the Federal government and, as of July 2019, is $18,200. This means that everyone who is an Australian resident for tax purposes, will pay no tax on the first $18,200 earned each financial year.

This amount is adjusted proportionately for those people who were residents for tax purposes for only part of the year.

Income earned above the threshold is subject to tax on a sliding scale depending on how much is earned.

Depending on the type of assets or investments you inherit, you may be required to pay tax. For example:

Superannuation: tax on a superannuation death benefit will depend on a number of factors including whether you receive a lump sum or an income stream, whether you were a dependant of the deceased or whether the super fund has already paid tax on the taxable component of the fund. Superannuation can be a highly complex area so it’s often wise to seek professional advice.

Assets: if you receive an asset, such as a house, you may be required to pay Capital Gains Tax (CGT) if you later sell that asset.

Income: if you receive an income from the deceased person’s estate, that income will most likely be assessable for tax in the financial year of your entitlement, not the financial year in which you received the income.

Depending on the type of assets or investments you inherit, you may be required to pay tax. For example:

Superannuation: tax on a superannuation death benefit will depend on a number of factors including whether you receive a lump sum or an income stream, whether you were a dependant of the deceased or whether the super fund has already paid tax on the taxable component of the fund. Superannuation can be a highly complex area so it’s often wise to seek professional advice.

Assets: if you receive an asset, such as a house, you may be required to pay Capital Gains Tax (CGT) if you later sell that asset.

Income: if you receive an income from the deceased person’s estate, that income will most likely be assessable for tax in the financial year of your entitlement, not the financial year in which you received the income.

Under 18s may be required to pay tax at a rate higher than adults if the income meets certain criteria, for example, when receiving a distribution from a family trust. This law was introduced to discourage parents from diverting income to their children.

For other sources of income, if you’re under 18 years old, you are required to pay tax at the same rates as adults assuming you are considered an ‘excepted person’. The definition of excepted person can be complex. Among other conditions, it may apply if:

You have finished full-time study,

You are working full-time

You have disabilities or are entitled to a double orphan pension

Australian tax law is a minefield of rules and exceptions, so it’s vital you seek professional advice if you have any doubts.

Under 18s may be required to pay tax at a rate higher than adults if the income meets certain criteria, for example, when receiving a distribution from a family trust. This law was introduced to discourage parents from diverting income to their children.

For other sources of income, if you’re under 18 years old, you are required to pay tax at the same rates as adults assuming you are considered an ‘excepted person’. The definition of excepted person can be complex. Among other conditions, it may apply if:

You have finished full-time study,

You are working full-time

You have disabilities or are entitled to a double orphan pension

Australian tax law is a minefield of rules and exceptions, so it’s vital you seek professional advice if you have any doubts.

If, in the past financial year, you have earned more than $18,200, (the tax-free threshold), you will need to lodge a tax return.

If not, you will need to complete a non-lodgement advice form to update the ATO of your tax situation. This makes sure the ATO records your current tax position and you’re not on their system as having an outstanding return.

If you’re not sure whether you need to lodge a tax return, the ATO provides a calculator so you can work it out for yourself. You’ll find it on the Calculators and tools page on www.ato.gov.au

If, in the past financial year, you have earned more than $18,200, (the tax-free threshold), you will need to lodge a tax return.

If not, you will need to complete a non-lodgement advice form to update the ATO of your tax situation. This makes sure the ATO records your current tax position and you’re not on their system as having an outstanding return.

If you’re not sure whether you need to lodge a tax return, the ATO provides a calculator so you can work it out for yourself. You’ll find it on the Calculators and tools page on www.ato.gov.au

Assessable income is income that results from work or services you perform and distributions or interest earned on investments.

Examples of assessable income include, but are not limited to:

Salary and wages

Rent, including private rentals such as holiday lets, like Airbnb, Hotels.com, etc

Dividends and other returns from investments

Interest from bank accountsAllowances for car, travel, laundry

Income paid by cash or cheque must also be included as assessable income and declared in your tax return.

Assessable income is income that results from work or services you perform and distributions or interest earned on investments.

Examples of assessable income include, but are not limited to:

Salary and wages

Rent, including private rentals such as holiday lets, like Airbnb, Hotels.com, etc

Dividends and other returns from investments

Interest from bank accountsAllowances for car, travel, laundry

Income paid by cash or cheque must also be included as assessable income and declared in your tax return.

To be eligible for the Government Co-contribution, your income, before tax in a particular year must be less than $56,112. Additionally, you need to make an after-tax contribution to your superannuation fund in that same year.

When you lodge your tax return, the government will either match your contribution, or calculate your entitlement to a maximum of $500, and apply it directly to your super fund

How much your entitlement is will depend on your income and how much your after-tax contribution to super is.

To be eligible for the Government Co-contribution, your income, before tax in a particular year must be less than $56,112. Additionally, you need to make an after-tax contribution to your superannuation fund in that same year.

When you lodge your tax return, the government will either match your contribution, or calculate your entitlement to a maximum of $500, and apply it directly to your super fund

How much your entitlement is will depend on your income and how much your after-tax contribution to super is.

Franking credits are also known as imputation credits. They are dividends paid on investments for which the fund has already paid tax at the company tax rate.

Shareholders whose top tax rate is less than the company tax rate are able to claim a credit of the amount of tax the company has already paid.

Franking credits most benefit investors whose tax rate is between 0 and 30%, but rebates will be paid proportionally based on the investor’s tax bracket.

That is, an investor in the 0% tax bracket will receive the full benefit of the franking credits. As the investor’s tax rate increases, the amount of franking credit rebate they are entitled to, will decrease proportionally.

Investors with a tax rate above 30% are not entitled to claim a tax credit.

Franking credits are also known as imputation credits. They are dividends paid on investments for which the fund has already paid tax at the company tax rate.

Shareholders whose top tax rate is less than the company tax rate are able to claim a credit of the amount of tax the company has already paid.

Franking credits most benefit investors whose tax rate is between 0 and 30%, but rebates will be paid proportionally based on the investor’s tax bracket.

That is, an investor in the 0% tax bracket will receive the full benefit of the franking credits. As the investor’s tax rate increases, the amount of franking credit rebate they are entitled to, will decrease proportionally.

Investors with a tax rate above 30% are not entitled to claim a tax credit.

When making claims and deductions in your tax return, you must be able to substantiate the claim. That means that if the ATO queries the amount, you must be able to provide evidence of both the amount and the fact that you’ve paid it.

That evidence will generally be in form of an official tax receipt or paid invoice. These documents must be kept for five years from the date you lodge your tax return.

When making claims and deductions in your tax return, you must be able to substantiate the claim. That means that if the ATO queries the amount, you must be able to provide evidence of both the amount and the fact that you’ve paid it.

That evidence will generally be in form of an official tax receipt or paid invoice. These documents must be kept for five years from the date you lodge your tax return.

Australia has one of the most complex tax systems in the world, and with its ever changing and evolving legislature, it seems to grow more complex every year.

Part of its difficulty lies in the entanglement of direct and indirect taxes, applied at both Federal and State levels – any wonder so many of us struggle to keep up!

Tax mistakes can be costly – however inadvertent they may be. If you’re unsure about your tax situation, or perhaps you simply need more information about a topic covered in our quiz, it’s advisable to speak to a professional tax accountant.

If you’re after more tailored assistance, chat with your financial adviser.

Would you like a copy of your responses? Complete the short form below and a copy will be sent to your inbox.