Taxation

Most taxpayers operate on a system of self-assessment,which means that you are responsible for preparing your tax return. It is your responsibility to maintain records; this is particularly important when you are claiming deductions, which are subject to strict substantiation requirements (i.e. you must be able to prove that an item you claimed as a deduction does exist and the amount claimed was correct).

The policy of self-assessment means that the Australian Taxation Office (ATO) initially accepts the information in your tax return. However, interest and penalties may be imposed if your tax return is incorrect.

The ATO conducts both systematic and random audits to ensure that taxpayers comply with their responsibilities. If you are subject to an audit, you will need to produce documentary evidence to establish that your tax returns have been true and correct.

In general, if you follow the ATO’s guidelines when preparing your tax return, you will not be charged a penalty if you make an honest mistake. Also, you can rely on the rights provided in the Taxpayer’s Charter published by the ATO. It sets out your rights and obligations, as well as the ATO’s service standards, dealing with various topics, including confidentiality, fair and reasonable treatment, and truthfulness. The Taxpayer’s Charter is available on the ATO’s website).

Taxation law is extremely lengthy and complex. This, plus your self-assessment responsibilities, means that it may be important for you to obtain professional taxation advice, particularly when completing a tax return. You may wish to consult a registered tax agent, although it may be appropriate to see a lawyer. You can obtain a tax deduction for amounts you spend in managing your tax affairs, including the preparation of your income tax returns by tax agents and the taxation advice you receive from tax agents and lawyers.

Individual taxpayers can use Tax Help (tel: 13 28 61). This is a free and confidential service provided by a network of ATO-trained and accredited community volunteers who help individuals complete their tax returns online using myTax.

All taxpayers are required to have a tax file number (TFN). Apart from serving as a means of identifying individual taxpayers, the number also helps the ATO collect tax that may otherwise escape the tax net.

If you are an employee, you are required to provide your employer with your TFN and, subject to some exceptions, you may choose to quote the TFN to investment bodies, such as banks, credit unions, building societies and companies issuing dividends. Unless an exemption applies, if you do not quote your TFN, tax will be deducted from interest and dividend payments at the highest marginal tax rate plus the Medicare levy under the PAYG system. The amount of tax deducted will reduce the amount of tax payable on your taxable income but will not be refunded until an income tax return for the year is lodged.

Trustees of closely held trusts must lodge a ‘TFN report’ by the end of the month following the quarter in which any new TFNs are notified to the trustees. For year-end distributions, TFN reports must be lodged by 31 July. Failure to report this information to the Tax Commissioner is an offence and may result in a fine of up to $1050 for a small entity; the penalty can be multiplied by up to 500, depending on the size of the entity and the overdue period.

If a beneficiary has not notified the trustee of their TFN either verbally or in writing before a ‘payment’ is made to them, including both a distribution of income of the trust or present entitlement, the trustee must withhold tax on that payment at the top marginal tax rate plus the Medicare levy and temporary budget levy (if applicable). The trustee will need to apply for PAYG withholding, and lodge an ‘Annual TFN withholding report’ by 30 September. Withheld amounts must be paid to the ATO by 28 October. The beneficiary can then claim a credit in their income tax return for any amounts withheld.

Some people who come to Australia as working holiday makers (i.e. holders of subclass visa 417 or 462) are considered to be foreign residents for tax purposes. Working holiday makers are generally ineligible to claim the tax-free threshold and, therefore, the first $37 000 of income they earn in Australia is subject to a 15 per cent tax (this is often referred to as the ‘backpacker tax’)  

However, working holiday makers may not need to pay the backpacker tax if if, in the 2021–2022 financial year, they were Australian residents for tax purposes and they are from a non-discrimination article country (Chile, Finland, Germany, Israel, Japan, Norway, Turkey, or the United Kingdom). That is, they can claim the tax-free threshold.

For further information about whether an individual is an Australian resident for tax purposes, see the ATO’s website.