The Australian Taxation Office (ATO) and, in some cases, state government revenue departments administer and collect taxes in Australia. Businesses can save money by paying on time and taking advantage of any tax breaks to which they are entitled.

Company (income) Tax, Capital Gains Tax (CGT), and the Goods and Services Tax (GST) are the main taxes that influence businesses. The Australian Government determines all of these levies. Businesses can choose to pay their taxes monthly, quarterly, or annually.

Tax is one of those life expenses that we may not enjoy paying, yet it is necessary for society to run correctly. Taxation assists both the national or federal government and local governments in funding critical local services and projects. However, while we all understand the fundamentals of taxes and how they work, understanding what a tax is and why taxes are necessary is a vital element of recognizing that they are a necessary part of society.

Taxation is a term that is used when an authority, usually a local or federal government, institutes a compulsory monetary obligation that most individuals are required to pay. Paying taxes is not a new phenomenon. Citizens and residents have been paying taxes to governments or officials for a significant length of time and are considered an essential payment in almost every single country in the world.

Taxation refers to all types of involuntary or compulsory levies that are imposed on both individuals and businesses. Some of the most common forms of tax are personal income tax, business tax, and GST (or Goods and Services Taxes). The most basic function or reason that taxes are levied is to raise revenue for government expenditures, though it can serve other purposes as well.

These expenditures include sectors such as education, health care, defense, and essential infrastructures such as roads or highways. Taxes are, therefore, crucial in contributing to the upkeep of important infrastructure, assisting people in everyday society and national security.

Why Are Taxes Necessary in Australia?

Many people often wonder what the main purpose of taxation is, but taxes are an essential part of our society. They’re the primary source of revenue for most governments, so they must be collected. A good tax system raises the revenue that is needed to finance essential government activities without imposing unnecessary costs on the economy.

Australia relies heavily on individual and corporate income taxes to finance essential government activities to assist local economies. These taxes are then spread across a variety of sectors with the aim of positively impacting both economic growth and the everyday lives of Australians. Wanting to know how and where your tax money is spent by the government is understandable.

It can help you understand why the taxes that you pay are essential and how they are contributing to your quality of life as well as general economic growth. Taxes are a financial mechanism that allows the government to perform or provide essential services that would not be provided otherwise.

Some of the most common ways that taxes are utilized in the economy and society include:

Healthcare

Medicare is a publicly-funded universal health care insurance scheme in Australia. It gives you access to a wide range of healthcare services that are already paid for. Some of the benefits include cheaper prescriptions, free appointments, and specialized health care or procedures. While not everything is covered under Medicare, it does cover a significant range of medical services that would otherwise be incredibly expensive.

As an Australian resident for tax purposes, you are subject to the Medicare levy. This Medicare levy helps to ensure that every Australian has access to free health care. The Medicare levy you are expected to pay is in addition to the tax you pay on your taxable income, although you may qualify for a reduction or exemption from the levy.

You may also be entitled to a rebate if you have a private health insurance policy. This is known as a private health insurance rebate which is applied at the end of the financial year.

Education

The Australian government contributes to the majority of schooling costs in an attempt to ensure that every child is able to attend school and gain an education. Part of the taxes that the government collects from you is utilized to help pay for the many costs that are associated with public education, from teachers’ salaries to building maintenance and upkeep.

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These taxes also ensure that government schools, also known as public schools, remain free to attend for Australian citizens and permanent residents. Investing in education is key in protecting Australia’s future.

Roads and railways

Having access to good roads and railway lines that are regularly maintained and kept in top condition is another way that your taxes are being spent by the government. The maintenance and building of roads is an ongoing expense that benefits every Australian citizen or permanent resident.

While some funding is provided by the Australian government and state or territory governments, the vast majority of road and railway maintenance is covered by the taxes or rates that you pay.

Defense

Another important area that your taxes are helping to fund is the Australian Defence Forces. The ADF is in charge of securing Australia’s borders and keeping everyone safe. Your taxes are going towards the country maintaining a standing defense force that is well-trained and able to contribute to world events when and where it needs to.

Many essential activities that Australia’s defense force participates in include search and rescue efforts, supporting allied nations and actively protecting our borders. With Australia investing a record amount of money into the Department of Defence, part of your taxes is going towards this cost.

Social Security and Centrelink

Finally, an incredibly important area that your taxes are helping to fund is social security and Centrelink. This is a service designed to assist individuals who need financial support by providing certain payments, such as parental leave, job seeker allowance, child care subsidy, and much more.

The taxes that every working Australian and permanent resident is expected to pay are key to maintaining this system. Without social security or Centrelink, there would be many Australians who would be unable to afford to live. Taxes help to ensure that this is not the case and that everyone gets the support they require.

What Taxes do Australians Pay?

Company tax

An Australian resident company is subject to company tax, at a rate set by the Australian Government. A non-resident company is taxed on its Australian source income at the same rate as a resident company. Taxable income and the tax rate may vary under limited circumstances, such as industry or business structure.

Capital Gains Tax

Capital Gains Tax (CGT) applies on any capital gain made through the disposal of assets. It is paid as part of income tax.

Foreign entities may be subject to CGT on assets acquired and used in carrying on a business in Australia. Businesses are required to keep records upon acquiring assets that may be subject to CGT in the future. Small businesses may also be eligible for CGT concessions under certain circumstances.

Goods and Services Tax

The Goods and Services Tax (GST) is a national, broad-based consumer tax on most goods and services sold or consumed in Australia.

Most businesses are required to register for GST with the Australian Taxation Office. Businesses that have paid for business supplies inclusive of GST are entitled to claim an equivalent input tax credit. Certain businesses may also be eligible for GST concessions.

Payroll Tax

Payroll tax is a state tax on the wages you pay to employees. It is calculated on the amount of wages paid per month and must be paid if total Australian wages exceed the exemption threshold in the relevant state or territory. The payroll tax exemption threshold and the payroll tax rate vary between states and territories.

Personal income tax

Personal income tax is probably the most common form of tax requirement that everyone will encounter in their working lives. Personal income tax is often also referred to as individual income tax. This tax is applied to an individual’s wages, salaries, investments, or any other form of personal income that an individual or household earns.

The tax amount that you pay depends on a variety of different factors, including how much you earn, how many jobs you have if you are considered a low-income earner or a high-income earner, etc. There are generally tax brackets that help determine how much you end up paying per tax year. There are also a number of exemptions, deductions, and credits available that can lessen how much tax you pay.

Due to these exemptions or tax breaks, most individuals will not end up paying taxes on all of their income, or they will receive a healthy tax return at the end of the financial year. The government and tax departments often offer a series of income tax deductions and other tax credits that taxpayers can make use of to reduce their taxable income.

These deductions can help to lower your taxable income, determine the tax rate or bracket that is applied to you, and calculate your overall tax owing amount. In the event that you have paid more tax than you owe, or you have a number of deductions that you can apply for, you will often qualify for a larger refund of your tax paid throughout the financial year.

Stamp duty

Stamp duty is another form of tax that is often applicable in the sale of assets from one individual or business to another. Stamp duty is imposed on certain transactions such as the transfer of property or motor vehicles and dealings with shares in companies that are landholders. It’s imposed on the acquirer in the relevant transaction, not the individual who is selling or transferring the asset.

One thing to keep in mind is the fact that the imposition of stamp duty is not consistent across states. Each state in Australia is going to have applicable stamp duty laws and how much the stamp duty is going to be for certain transactions. While it can generally be imposed at either a fixed rate or at a rate that depends on the value of the transaction, there are instances where it is going to differ or be subject to a certain situation.

Understanding your state’s laws surrounding stamp duty will help you understand how it can impact you if you’re buying or selling large assets. For example, several Australian states impose stamp duty on transfers of land according to a sliding scale. This sliding scale is dependent on the value of the property and is going to be specific to the home or property being sold.

As a general rule of thumb, the lower the price of the house or asset, the lower the stamp duty fees are going to be. The cheapest valued properties can often attract stamp duties of around 1.25%.
As properties increase in price, the rate will progressively increase to around 6-7%.

Due to the fact that stamp duty can, and often does vary by state, it’s important to consider stamp duty rules on a state-by-state basis. Property and other assets such as business assets or vehicles are going to attract stamp duty rates that will likely vary significantly.

Additionally, some transactions may receive concessions or exemptions that may not be applicable in other states or territories.

Bottom line

Taxes are an essential aspect of Australian society. Whether you are required to pay personal income tax, capital gains tax or business taxes, knowing why you’re paying them can assist you in understanding the important part they play in our economy.

The taxes that we pay to the government allow our federal and local state governments to provide us with services and facilities that help to better Australia for everyone living here.

From providing publicly funded health care and education to ensuring that public infrastructure such as roads, railways, and highways are in top condition, there are many aspects to taxes that we benefit from every single day.