Personal Tax – How Employment Income Is Taxed in Australia

 

As an expatriate moving to Australia one of the important tax issues is how your salary would be taxed.

Australia does not have a separate salaries tax per se. Rather your employment income and all your other income such as investment income is added together and forms part of your assessable income in Australia.

Once you have calculated your assessable income you then need to work out your ‘allowable deductions’ before you arrive at your taxable income.

A number of items can be considered to be deductions against employment income but care needs to be taken to ensure the strict rules regarding employment-related deductions are complied with.

The Basics

You pay tax based on your taxable income. The personal income tax rates which apply to you are published every year by the ATO. Australia’s current personal tax rates can be found here.

You will notice that the top tax rate in Australia is 45% and this rate applies once your income is more than $180,000 for the tax year. The income tax year commences on 1 July and ends on the 30 June year.

If you derive employment income then Australian tax law requires your employer to deduct what is known as PAYG (Pay as You Go) from your salary and you are paid a net amount after tax.

Your Australian employer is then required to pay the ATO (typically on a monthly basis) the amount of PAYG they withhold from your salary.

At the end of the year (30 June) your employer has to issue what is known as a PAYG Payment Summary which details the gross salary paid to you for the tax year, the amount of PAYG withheld and the net amount paid to you.

The information is automatically reported to the Australian Taxation Office and recorded against your Tax File Number.

If you are receiving allowances, such as car allowances or travel allowances, then these will also be summarised on the PAYG Payment Summary.

If you are moving to Australia and you commence your employment halfway through a tax year then typically your employer will still be required to deduct PAYG from your employment income as if you had been employed for a full year.

Because of the graduated tax rates, this would mean that typically unless you have other income to declare – such as investment income – you would receive a tax refund in your first year after moving to Australia. 

How employee share scheme interests are treated

Many expats moving to Australia also participate in employee share schemes.

In Australia (as in many countries) gains made from the participation in employee share schemes are considered to taxable as employment income.

Employers in Australia must also prepare annual payment summaries (known as ESS Payment Summaries) where they are required to report the total amount of income that an employee has earned that year through participation in an employee share scheme or employee options plan. This can be a complicated area of tax for many expatriates.

One issue which many expatriates can tend to overlook is if they receive foreign salary income or employee share scheme income after they move to Australia, then they will be taxable on that income even if they performed the employment duties outside Australia.

Hence expats moving to Australia who may be due to deferred bonuses or other employment-related compensation need to be aware that such income is taxable in Australia.

If the tax is paid overseas on that income then generally the expat will be able to claim a foreign income tax offset (foreign tax credit) in Australia for tax already paid overseas. It is only in rare circumstances that employment-related payments would not be taxable income in Australia.

If you have questions about cross border salary payments or other employment income issues which you need to be resolved CST Tax Advisors can assist you.

Written by: Matthew Marcarian from CST Tax Advisors