Last updated on 3 de April de 2023
Australia is one of the most popular countries in the world. We will analyze taxes in Australia in a comprehensive manner, so that you can understand how much workers, investors, and corporations pay.
- Taxes on Earned Income
- Capital Income Taxes
- Goods and Services Tax
- Stamp Duty
- Corporate Tax
- Australia Public Finances
Australia is a unique country. It is a geographically huge but with a population of only about 25 million people. Two thirds of its residents live concentrated in the 5 most important metropolitan areas of the country: Sydney, Melbourne, Brisbane, Perth and Adelaide.
Australia is also one of the most prosperous countries in the world. According to the World Bank, its GDP per capita was the 18th highest in the world in 2021. This puts it ahead of places like the Netherlands, Germany, Sweden, Canada and Japan.
Much of its economy depends on producing and exporting commodities. Thus, Australia is fortunate to have abundant natural reserves of gold, silver, iron, nickel, copper, uranium and zinc. Most of these minerals are exported to their Asian neighbors, mainly China.
As a result, Australia is the Western country with the most economic exposure to China. Consequently, Chinese investors have been very interested in investing in Australia.
One of the reasons for its popularity is its good weather. This makes it an attractive place for people from other Anglo-Saxon countries to emigrate to.
Australia uses its own currency, the Australian dollar (AUD). Throughout this analysis we will refer to the original amounts in both Australian Dollars as well as their equivalent in US Dollars at an approximate exchange rate of $1 = AUD 1.50.
Australia is not a cheap country. According to WorldData.info, the cost of living in Australia is 18% higher than in the United States and 10% higher than in the UK. And real estate prices in some areas of the country are comparable to London and New York.
Taxes on Earned Income
In Australia, earned income is subject to income tax and Medicare Levy, an additional tax intended to finance the healthcare system. In this sense, Australia has no social security contributions.
Income tax in Australia is progressive and has 5 different brackets:
- 0 to 18,200 AUD ($0 to $12,133): 0%
- 18,200 to 45,000 AUD ($12,133 to $30,000): 19%
- 45,000 to 120,000 AUD ($30,000 to $80,000): 32,5%
- 120,000 to 180,000 AUD ($80,000 to $120,000): 37%
- More than 180,000 AUD ($120,000): 45%
At the same time, the first AUD 700 ($467) to be paid in taxes is exempt. This means that, effectively, any salary below 21,900 AUD ($14,600) does not pay income tax.
To all these tax rates must be added an additional 2% in Medicare Levy. This tax, introduced a few decades ago to finance public healthcare in Australia, is paid on the entire gross salary.
Something that should also be noted is that, although Australia does not have social security payments, companies are obliged to contribute to the pension plan of their employees. These pension plans, known as “Superannuation” or “Super”, can be invested in a multitude of assets.
The contributions that companies must make are 10.5% of the gross salary up to 228,360 AUD ($152,240). Something we must keep in mind is that, even if we leave Australia in the future, we will have to wait until retirement to access this money.
Total Tax Burden on Earned Income
To understand the total level of taxation on earned income, it is interesting to compare the total employment costs on the side of employers with the employee’s net salary.
This will allow us to see how much money is going to the state, to the employee’s Superannuation and the employee.
We will do these calculations for various income levels and base them on an individual who is unmarried and has no dependents:
These same data can be displayed graphically, which will make the analysis even more interesting:
As you can see, the total tax burden is very low for low-income earners, and moderate for middle incomes. High-income earners do face very hefty taxation, comparable with most other Western countries.
Capital Income Taxes
Let us now analyze how income from savings and investments is taxed in Australia:
Collecting dividends in Australia is subject to taxes. Tax rates for dividends are exactly the same as for earned income. And the additional 2% Medicare Levy must be paid too.
However, the amount of tax payable will be different depending on whether the company paying the dividend is Australian or not. And this might make our tax bill less onerous.
If we collect dividends from an Australian company, any amount paid in corporation tax will be used to offset our tax bill. This is to avoid double taxation.
For example, if the company has had a dollar of profit, it will have to pay 30 cents in corporate tax (30%). If we are then paid a dividend of 70 cents, the tax authorities will consider that we received a dollar in dividends and already paid 30 cents in tax. If our marginal income tax rate is 37%, we will only have to pay the 7%. If our marginal tax rate is 19%, we will receive 11% back.
In the case of dividends from abroad, the corporation tax paid by those companies will not be taken into account to offset our tax bill. The only thing that will be taken into account are the withholdings tax at source.
Any income we receive from bank deposits or fixed income investments is subject to income tax. The applicable rates are the same as for earned income which, including the Medicare Levy, can be as high as 47%.
In the case of interest income, it does not matter if we collect that income from an Australian or foreign entity.
Realized Capital Gains
Capital gains from investments have a more advantageous tax treatment than either dividends or interest. This is because, although the applicable tax rates are the same, we only have to pay taxes on 50% of the capital gain. The other 50% is exempt.
As a result, if we combine both income tax and Medicare Levy, the marginal tax rate applicable to realized capital gains in Australia is 23.5%.
Rental income is subject to the same progressive rates. Taxes are paid on the net rental income, which is the gross income minus all expenses associated with the ownership and upkeep of the property.
Goods and Services Tax
The Goods and Services Tax takes the consumption of goods and services in Australia. It has two different rates.
The general GST rate in Australia is 10%. Most products and services are subject to this rate.
Certain products are subject to a 0% GST are, therefore being exempt from this tax. The following products benefit from the reduced rate: most foods, education, healthcare, medicines, feminine hygiene products, water supply and precious metals.
This last point is interesting. While in many countries only gold is considered an investment product and thereby exempt from sales taxes, in Australia silver and platinum are also exempt from GST.
The purchase of a home in Australia is subject to tax. In this case, we are talking about Stamp Duty. The amount payable in Stamp Duty depends on the state in which the property is located, its purchase price, whether it is our first purchase, and whether we own other properties.
Many states offer partial or full Stamp Duty exemptions to those who purchase their first residence. However, in some of them, the exemption is only valid if you buy a new home.
At the same time, registration fees may also have to be paid when buying a property.
Because each state has its own Stamp Duty rates and thresholds, the simplest thing is to see what percentage we would pay in each of them, depending on the amount we pay for a house or apartment, if we did not benefit from any exemption:
As you can see, the effective percentages for most properties are between 3 and 5%. It should be noted that the value of real estate in some states, such as New South Wales or Victoria, is generally much higher than in the rest of the country. It is in these states where the largest Australian cities, Sydney and Melbourne, are located.
Profits are subject to corporate tax. In Australia, the standard corporate tax rate is 30%. However, this percentage is only paid by medium and large corporations with annual sales of at least 50 million AUD ($33.3 million).
Companies with an annual turnover of less than 50 million AUD are considered “small” for corporate tax purposes and subject to a rate of 25%.
Something to note is that, when distributing dividends, any amount paid by the company in corporation tax will be considered as having been paid by the shareholder. This is to avoid double taxation.
For example, if the shareholder’s marginal income tax rate is 20%, the Australian treasury will refund the difference between the tax due (20%) and the amount already paid by the corporation before paying the dividend (25% or 30%).
Australia Public Finances
We will now assess the state and sustainability of the Australian public finances. We will do this by looking at the level of public debt relative to the size of the economy.
The chart below shows the ratio between public debt and GDP in Australia:
As we can see, 2019 ended with public debt close to 75% of GDP. Although this percentage is moderate for a developed country, the trend is somewhat worrying, as public debt has been increasing for several years.
At the same time, Australia faces two great threats. The first one is domestic and has to do with its housing bubble. If it were to pop, it could greatly affect its economy and the state of the country’s public finances.
The second one is foreign and has to do with China. If China were to suffer a heavy recession, demand for commodities would plummet and the Australian economy would suffer.
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And if you want to read about another interesting country in the Asia-Pacific region, check out this link:
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