The Australian Tax System is very difficult to navigate, with income tax, payroll tax, GST, fringe benefits tax and capital gains tax. For that reason, most people tend to steer away from looking at ways to minimize tax – it takes someone who is well versed in the intricacies of the system to understand the ins and outs of gaining the maximum financial benefits, whilst remaining fully compliant.
The basics.
In Australia, Income tax is collected by the Australian Taxation Office (ATO) for the Government of Australia. It is levied on three different sources: the individual, business income and capital gains. Income received by individuals is taxed at progressive rates, while income derived by companies is taxed at a flat rate of 30%.
The financial year is from I July to 30 June of the following year. The current tax-free threshold is $6,000, and the highest marginal rate for individuals is 45%, Most Australians are liable to pay a standard Medicare levy of 1.5% of their taxable income. (link to Medicare)
Income tax is withheld by Corporates from wages and salaries. This can result in refunds payable at the end of the financial year. Every employee will need a nine digit Tax File Number (TFN). If a TFN is not provided, Corporates must withhold 46.5% from the first dollar. (link to TFN Application)
Corporate and business taxpayers are required to provide their TFN or Australian Business Number (ABN) to the bank which will hold their earnings, otherwise the bank will be required to withhold income tax at the highest rate of tax (46.5%) (link to ABN information)
In Australia, it is required by law that individuals complete and file a tax return every year. Job Capital make it as easy as possible for you to comply – we’ll take care of the paperwork and ensure your return is lodged on time.
To start your tax return click here
Fringe Benefits Tax.
The only way to reduce your tax payable is to lower your taxable income. This can be done by utilizing the fringe benefits tax (FBT) system, to divert some of your earnings from your taxable income into fringe benefits.
For more information, go to SALARY PACKAGING
Independent structures.
Working as an independent contractor offers you flexibility and tax minimization benefits. Structures include a sole trader/partnership, where you invoice the client for your work and pay your own taxes and Superannuation in a Quarterly or Annual Business Activity Statement. There is no opportunity for salary packaging within this structure, and there may be difficulties in obtaining certain types of insurance cover.
http://www.ato.gov.au/businesses/pathway.asp?pc=001/003/021/001
The Pty Ltd structure is incorporated to become its own legal entity, which is separate from its owners. The process of gaining a tax benefit from this structure is somewhat complex, but if you are compliant you have the ability to claim business expenses incurred, salary packaging, personal risk mitigation, payment of wages to associates and retaining of earnings for investment into the business.
Another independent structure option, the trust structure, is probably the most complex and difficult of tax minimization, but with greater benefits.
What is an independent contractor?
An independent contractor is an entity (such as an individual, partnership, sole trader, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor:
- is paid for results achieved
- provides all or most of the necessary materials and equipment to complete the work
- is free to delegate work to other entities
- has freedom in the way the work is done
- provides services to the general public and other businesses
- is free to accept or refuse work, and
- is in a position to make a profit or loss.
What is an employed contractor?
Generally, an individual is considered to be an employee if they:
- are paid for time worked
- receive paid leave (for example, sick, annual or recreation, or long service leave)
- are not responsible for providing the materials or equipment required to do their job
- must perform the duties of their position
- agree to provide their personal services
- work hours set by an agreement or award
- are recognised as part and parcel of the payer’s business, and
- do not take commercial risks and cannot make a profit or loss from the work performed.
If you’re not sure what structure is right for you, contact Job Capital. Our impartial assessment will help you establish your ideal contracting structure. For more information please visit http://www.ato.gov.au/businesses/content.asp?doc=/content/00182084.htm&page=2&H2 or see our Tax & Superannuation section