Tax 101 Fundamentals
Understand Australian taxation from the ground up. Learn about income tax, deductions, capital gains, and business tax with interactive calculators and real-world examples.
Learning sections
Interactive calculators
Quizzes & games
What is Tax?
Tax is a compulsory financial charge imposed by the Australian government on individuals and businesses. It funds essential services like healthcare, education, defence, and infrastructure. Let's explore the different types of taxes you need to know about.
Income Tax
Tax on your salary, business income, and investment returns
GST
10% tax on most goods and services (goods and services tax)
Capital Gains Tax
Tax on profit from selling assets like property or shares
Medicare Levy
2% levy on income to fund the Medicare health system
Scenario
Sarah earns $60,000 salary as an accountant
Which tax applies?
Why Does Tax Matter?
- ✓Tax funds essential government services we all rely on
- ✓Understanding tax helps you make better financial decisions
- ✓Proper tax planning can reduce your tax burden legally
- ✓Knowing your obligations helps you avoid penalties
Your Tax Obligation
Do you need to lodge a tax return? The answer depends on your income, employment status, and residency. The Australian Tax Office (ATO) has clear rules about who must lodge and when.
Quick Facts
Tax-Free Threshold
$18,200
If you earn less than this as a resident, you may not need to lodge
Financial Year
July 1 – June 30
Australian financial year runs from July 1 to June 30
Lodgement Deadline
October 31
Lodge by this date to avoid penalties (penalty-free period extension available)
Non-Residents
Must Lodge
International students and non-residents must lodge if earning Australian income
Do I Need to Lodge?
Your Situation
I am an Australian resident working as an employee earning $45,000
Do you need to lodge a tax return?
Tax Obligations by Status
| Status | Must Lodge? | Key Points |
|---|---|---|
| Employee | Yes (if income > $18,200) | Employer withholds tax. Lodge to claim deductions or get refund. |
| Contractor | Yes (generally) | Must lodge to claim business expenses and deductions. |
| Business Owner | Yes (always) | Must lodge regardless of profit/loss to satisfy obligations. |
| International Student | Yes | Non-residents must lodge if earning Australian income. |
| Retiree | Maybe | Depends on income sources and amounts. Check ATO website. |
Important Dates
July 1 – Financial Year Starts
New tax year begins. Start collecting records.
June 30 – Financial Year Ends
Tax year closes. Gather all income and expense documents.
October 31 – Lodgement Deadline
Lodge your return by this date to avoid penalties.
After October 31 – Penalties Apply
Late lodgement penalty increases the later you file. Extension may be available.
Key Takeaways
- ✓Most people earning over $18,200 must lodge a tax return
- ✓Contractors and business owners must always lodge regardless of income
- ✓Non-residents must lodge if earning Australian income
- ✓The October 31 deadline is important – lodge early to avoid penalties
- ✓If unsure, check the ATO website or contact your tax agent
- ✓Keep records for 5 years in case of ATO audit
Income & Deductions
Understanding what counts as assessable income and what you can deduct is crucial for minimizing tax. The key is the "nexus test" – your expense must be directly connected to earning income.
Types of Assessable Income
Salary & Wages
Income from employment
$60,000 annual salary
Business Income
Net profit from self-employment or business
Freelancer earning $50,000 profit
Interest Income
Interest from savings, bonds, loans to others
Bank interest of $200
Dividend Income
Dividends from shares
Share dividends of $1,500
Capital Gains
Profit from selling an asset
Sold investment property for $50,000 gain
Rental Income
Income from renting out property
Monthly rental income
The Nexus Test
The nexus test determines whether an expense is deductible. For an expense to be deductible, there must be a clear connection (nexus) between the expense and earning income.
In simple terms: "Is this expense essential to earning my income?"
If the answer is yes, it's likely deductible. If it's a personal living expense, it's not deductible.
Deductible or Not?
Expense to Classify
Work uniform ($500)
Is this deductible?
Common Deduction Categories
Work-Related Expenses
• Uniform or protective clothing
• Home office furniture and equipment
• Work-related car expenses
• Professional fees and subscriptions
• Work-related education (job-related)
Must have a nexus to earning income - the expense must be directly connected to earning income
Investment Expenses
• Interest on investment loans
• Property management fees
• Investment advisor fees
• Rental property maintenance
• Depreciation on investment property
Expenses directly related to producing investment income
Self-Education Expenses
• General education (university without work connection)
• Career change training
• Hobby-related courses
Not deductible - education costs are personal expenses
Business Supplies & Materials
• Office supplies
• Tools and equipment
• Raw materials for business
• Software and technology
Must be essential to earning income through your business
Meals & Entertainment
• Meals while at work
• Entertainment expenses
• Gym membership
Not deductible - personal living expenses
Travel Expenses
• Work-related travel (conferences, client meetings)
• Travel between multiple workplaces
• Business vehicle expenses
Must be directly for earning income, not commuting to regular workplace
Key Principles
- ✓Deductions must pass the nexus test – direct connection to earning income
- ✓Personal living expenses are NEVER deductible (meals, gym, hobbies)
- ✓Keep receipts and documents for 5 years to support your claims
- ✓Estimate and apportion expenses if partially work-related
- ✓Record keeping is critical – diaries for travel and work-from-home claims
- ✓When in doubt, check the ATO website or ask your tax agent
Tax Brackets & How Much Do I Owe?
Australia uses a progressive tax system where different income levels are taxed at different rates. The higher your income, the higher your tax rate—but only on the income within each bracket.
💡 Common Misconception
Many people think that moving into a higher tax bracket means ALL your income is taxed at that higher rate. This is incorrect.
Reality: Only the income within each bracket is taxed at that bracket's rate. If you earn $50,000, you don't pay 32.5% on all $50,000—you pay 0% up to $18,200, then 19% on the remaining $31,800.
Interactive Tax Calculator
Your Income & Deductions
Tax Offsets
Tax Calculation
Marginal Rate: You're in the 32.5% tax bracket. For every $1 you earn, 32.5% goes to tax.
2024-25 Tax Brackets
| Income Range | Tax Rate |
|---|---|
| Tax-free threshold | No tax |
| $18,201 – $45,000 | 19.0% |
| $45,001 – $120,000 | 32.5% |
| $120,001 – $180,000 | 37.0% |
| $180,001 and above | 45.0% |
Marginal vs Effective Tax Rate
Marginal Tax Rate
The tax rate you pay on your NEXT dollar of income. This is the bracket you're currently in.
Income: $60,000
Marginal Rate: 19%
Effective Tax Rate
The average tax rate on your TOTAL income. This is usually lower than your marginal rate.
Income: $60,000
Effective Rate: ~13.8%
Key Takeaways
- ✓Australia uses a progressive tax system (brackets increase with income)
- ✓Tax-free threshold is $18,200 – no tax if you earn below this
- ✓Each bracket only applies to income within that range
- ✓Your marginal rate = tax rate on your next dollar earned
- ✓Your effective rate = average tax on all your income
- ✓Higher earners pay higher tax rates, but the system is still progressive
- ✓Deductions reduce your taxable income, which can lower your bracket
Capital Gains & Losses
When you sell an asset (property, shares, crypto) for more than you paid, that profit is taxable. Fortunately, Australia offers a 50% discount for assets held longer than 12 months.
What is a Capital Gain?
A capital gain is the profit you make when selling an asset for more than you bought it for.
Interactive CGT Calculator
Asset Details
✓ Eligible for 50% CGT discount
CGT Calculation
✓ You qualify for the 50% CGT discount because you held the asset for over 12 months.
Impact of Hold Period
If held 12+ months (ELIGIBLE)
$16,250.00
CGT payable with discount
If held less than 12 months (NO DISCOUNT)
$32,500.00
CGT payable without discount
Savings by waiting 12+ months: $16,250.00
Test Your Understanding
Investment Scenario
Investment property
Purchase Price
$500,000.00
Sale Price
$600,000.00
Hold Period
8 months
Tax Bracket
33%
Try to calculate:
- • What is the capital gain?
- • Does it qualify for the 50% discount?
- • What is the taxable gain?
- • What is the estimated CGT payable?
Key Rules
50% CGT Discount
For assets held > 12 months (individuals only)
No Discount
If held ≤ 12 months, full gain is taxable
Main Residence Exempt
Your home is exempt from CGT
Capital Losses
Can offset gains, carry forward indefinitely
Key Takeaways
- ✓Capital gains are taxable profits from selling assets
- ✓Hold assets 12+ months to get the 50% CGT discount
- ✓Your main residence is exempt from CGT
- ✓Capital losses can offset gains and carry forward
- ✓The discount only applies to individuals, not companies
- ✓Keep records of purchase date and price for tax time
For Business Owners
Business owners have additional tax obligations. Your entity structure, income level, and business expenses determine your tax position. Understanding your quarterly tax is critical.
Business Entity Structures
Sole Trader
- Tax: Your personal tax rate (no company tax)
- Liability: Unlimited personal liability
- Best for: Freelancers, small businesses
Partnership
- Tax: Each partner pays personal tax on share
- Liability: Unlimited personal liability
- Best for: Professional practices, joint ventures
Company
- Tax: 30% company tax (income split with dividends)
- Liability: Limited to company assets
- Best for: Growing businesses, high income
Trust
- Tax: Variable (beneficiary tax rates)
- Liability: Protected by trust structure
- Best for: Asset protection, family wealth
Before You Choose a Structure: Know the PSI Rules
The ATO closely watches Personal Service Income arrangements
What is Personal Service Income?
Income earned mainly from your personal skills, efforts, or expertise — not from a business structure, assets, or employees.
Why it matters
The ATO closely scrutinises PSI arrangements. If your income is primarily from personal effort, the PSI rules may attribute that income directly back to you — regardless of the entity you operate through.
If PSI rules apply, you cannot:
- ✗Income is attributed back to you personally and taxed at your individual marginal rate
- ✗Cannot split income with family members through a company or trust
- ✗Cannot retain profits in a company to defer tax
- ✗Limited deductions — only deductions you could claim as an individual employee
Commonly affected workers:
💡 The ATO uses several tests (Results Test, 80% Rule, Unrelated Clients Test) to determine if PSI rules apply. Passing just one test can exempt you. Always consult a registered tax agent before structuring your business.
Quarterly Tax Installments
Business Details
Companies pay 30% tax. Sole traders/partnerships pay their personal marginal tax rate.
Tax Summary
2024-25 Quarterly Payment Schedule
Q1 (July-Sept)
Due: Oct 28
$7,500.00
Q2 (Oct-Dec)
Due: Jan 28
$7,500.00
Q3 (Jan-Mar)
Due: Apr 28
$7,500.00
Q4 (Apr-June)
Due: July 28
$7,500.00
How to Make Quarterly Payments
Calculate Your Estimate
Use this calculator to estimate your quarterly tax based on your expected profit
Register for PAYG Instalments
Contact the ATO or register online if not already registered for quarterly tax payments
Pay on Time
Pay by the due date (usually the 28th) to avoid penalties. You can pay online via the ATO portal.
Adjust if Needed
If your profit changes significantly, you can request the ATO to adjust your payment amount
⚠️ Important
This calculator provides an estimate. Your actual quarterly tax obligation depends on your actual profit, not estimates. If your profit differs significantly from your estimate, the ATO may adjust your payment or you may need to make a final adjustment in your tax return. Consult your tax agent for personalized advice.
Find Your Structure
Business Scenario
Freelance consultant earning $120,000/year
Business Factors
Annual Turnover
$120,000
Has Employees
✗ No
Business Risk
low
Capital Raising
✗ No
💡 What structure would you choose?
Consider liability protection, tax efficiency, and complexity when making your choice.
Deductible Business Expenses
- ✓Salaries and wages paid to employees
- ✓Office supplies and equipment (under $300)
- ✓Rent and utilities for business premises
- ✓Vehicle expenses (with diary substantiation)
- ✓Professional fees (accountant, lawyer)
- ✓Insurance relevant to the business
- ✓Advertising and marketing
- ✓Travel for business purposes
Records & Compliance
The ATO can audit you up to 5 years after lodgement. Proper record keeping protects you and substantiates your tax claims. Here's what you need to know.
What Records to Keep
Income records
Invoices, payslips, PAYG statements
Deduction receipts
Receipts, invoices, bank statements
Work diary
Travel diary, work log for claims
Business records
General ledger, invoices, contracts
Asset records
Purchase receipts, depreciation records
ATO Audit Triggers
High deduction-to-income ratio
Deductions exceed 40% of income
High RiskLarge cash income not declared
Tips, cash-only business
High RiskInconsistent claims year-to-year
Home office claim drops from $5,000 to $500
Medium RiskWork-related vehicle claim
100% work-related claims are scrutinized
Medium RiskSelf-education expenses
Career change training claimed
Medium RiskHobby-turned-business
Art hobby claimed as business expense
Low-Medium RiskBest Practices
- ✓Keep all receipts and invoices – digital or paper
- ✓Organize records by category for easy reference
- ✓Keep work diaries for travel and work-from-home claims
- ✓Save bank statements to match your records
- ✓Keep purchase receipts for assets (for depreciation)
- ✓Maintain a mileage log if claiming vehicle expenses
- ✓Don't claim personal expenses mixed with business
- ✓Review and reconcile records before tax time
Your Tax Return Action Plan
Ready to file your tax return? Here's the step-by-step process to help you get the maximum refund while avoiding common mistakes.
Step-by-Step Filing Guide
Gather Your Documents
PAYG statements, invoices, receipts, work diaries
Calculate Your Income
Total all income sources for the financial year
List Your Deductions
Organize deductions by category with supporting docs
Check for Offsets
Ensure you're eligible for tax offsets (LITO, etc)
File Your Return
Online via myTax (ATO website) or tax agent
Lodge by Deadline
Lodge by October 31 to avoid penalties
Track Your Refund
Use your Notice of Assessment (NOA) to track refund
Common Tax Mistakes to Avoid
❌ Not declaring cash income from side hustle
Issue: Underreported income on tax return
Consequence: ATO audit, penalties, interest charges
How to Avoid: Declare all income including cash, transfers, tips
❌ Claiming meals and gym membership as work expenses
Issue: Invalid personal living expense deductions
Consequence: Audit, disallowed deductions, penalties
How to Avoid: Only claim expenses directly connected to earning income
❌ Claiming large deductions without receipts or documentation
Issue: Cannot substantiate claims if audited
Consequence: Deductions disallowed, back taxes owed
How to Avoid: Keep all receipts, invoices, and records for 5 years
❌ Claiming 100% of car expenses as work-related
Issue: ATO requires work diary to substantiate claim
Consequence: Deduction disallowed, audit
How to Avoid: Keep a work-related vehicle log for at least 4 weeks
❌ Not claiming eligible tax offsets (LITO, SATO)
Issue: Overpaying tax unnecessarily
Consequence: Missing out on tax benefits
How to Avoid: Review all available offsets on your tax return
❌ Lodging tax return after October 31 deadline
Issue: Penalties apply after penalty-free period
Consequence: Late lodgement penalty, interest
How to Avoid: Lodge by October 31 or get extension from ATO
Important Dates
July 1
Financial year starts
June 30
Financial year ends
Oct 31
Tax return due (penalty-free)
Nov 1+
Late lodgement penalties apply
Useful Resources
ATO Website
ato.gov.au – Official tax office resources
myTax
Free online tax return filing tool from the ATO
Tax Agent Help
Find a qualified tax agent for personalized advice
Community Support
Free tax help from community organizations
Final Tips
- ✓File early – don't wait until the last minute
- ✓Double-check all numbers before submitting
- ✓Keep a copy of your submitted return for your records
- ✓Track your refund using your return reference number
- ✓If you owe tax, set up a payment plan if needed
- ✓Update your details if anything changes (address, income)