The imputation system provides a way for Australian and New Zealand corporate tax entities that pay Australian tax, to pass on to their members a credit for Australian income tax they have paid. This prevents the same income from being taxed twice - once when the income is earned by the entity, and again when the income is distributed to members.
Franking accountThe franking account is a record of franking credits and franking debits that arise in an income year. All corporate tax entities are required to maintain a franking account, which is a notional account for tax purposes that is separate to the entity's financial accounts. Corporate tax entities are taxed at the company income tax rate (currently 30%). Typically a franking credit would arise in the franking account when the corporate tax entity pays income tax or receives a franked distribution. A franking debit would arise when the corporate tax entity pays a franked distribution or receives a refund of income tax it has paid. There are numerous other events that may give rise to franking credits or franking debits.
At the end of an income year, an entity that has a deficit in its franking account is liable to pay franking deficit tax.
Franked distributionsThe imputation system works by franking a distribution. The general principle is that the entity allocates franking credits to members by attaching franking credits to a distribution. For example, the entity earns $100 of profits and pays $30 tax. The entity pays a dividend of $70 to its members and attaches franking credits of $30. The entity is required to give each member a distribution statement which must contain required information about the distribution. A long list of compliance and integrity measures exists to prevent abuse of the system.
Receiving a distributionThe general rule for individuals receiving a franked distribution (either directly, or indirectly through interposed entities) is called the "gross-up and credit" approach. The member who receives the $70 franked dividend must include $100 in assessable income ($70 + $30 franking credit), and is entitled to a tax offset of $30. If the individual's tax on the dividend (at marginal rates) is more than $30, the individual will need to pay the difference on assessment. If the individual's tax on the dividend is less than $30, the net amount is refundable.
The "gross-up and credit" approach also applies to corporate tax entities who receive a franked distribution, with some differences. Because the company tax rate is 30%, the $30 franking credit generally cancels out the entity's tax on the distribution. However, if the entity has offsetting expenses, such that the entity's overall tax liability is less than $30, the net amount is not refundable. Rather, the excess franking credit is converted to a tax loss that can be deducted against income in later years. As noted above, the franking credit attached to the distribution also creates a franking credit in the recipient entity's franking account, which it can pass on to its members.
Trans-Tasman imputationThe trans-Tasman imputation system allows a New Zealand company to choose to enter the Australian imputation system. This will allow the New Zealand company to maintain an Australian franking account and pay dividends franked with Australian franking credits. Reciprocal rules have been introduced by the New Zealand government to allow an Australian company to elect into the New Zealand rules.
Income tax is levied on taxable income, which is calculated as assessable income less allowable deductions. Gross tax on taxable income is reduced by tax offsets, to arrive at net tax payable or refundable.
Individuals
The Australian Taxation Office (ATO) publishes lists of assessable income, allowable deductions and tax offsets for individuals. Sole traders declare business income in their individual income tax return, they are not required to complete a separate return for their business. Tax on individuals is charged at marginal rates. You can use the tax tables to determine how much you are taxed.
Resident tax rates 2023-24
| Taxable income | Tax on this income |
| $0 - $18,200 | $0 |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37c for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45c for each $1 over $180,000 |
The above rates do not include the Medicare levy of 2%
MORE: See the ATO web site for more information on tax rates for Australian residents.
Foreign resident tax rates 2023-24
| Taxable income | Tax on this income |
| $0 – $120,000 | 32.5c for each $1 |
| $120,001 – $180,000 | $39,000 plus 37c for each $1 over $120,000 |
| $180,001 and over | $61,200 plus 45c for each $1 over $180,000 |
MORE: See the ATO web site for more information on tax rates for foreign residents.
Companies
A company is a distinct legal entity with its own income tax liability, and is required to lodge a Company income tax return. The company tax rate is generally 30%. Special rates apply to certain types of companies, or companies in certain industries.
Partnerships
A partnership carrying on a business must complete a Partnership tax return to show all income earned and deductions claimed for the income year, and how the net income or loss was shared between the partners. The partnership itself is not a taxable entity. Rather, each partner includes a share of the partnership's net income or loss in the partner's taxable income.
Partnerships where the only income is from joint investments (for example, jointly owned shares or rental properties) are not required to lodge a Partnership income tax return. Rather, each partner's share of the joint income is declared in the partner's own tax return.
Trusts
Where a beneficiary (not under a legal disability) is presently entitled to a share of net income of a trust, the trustee is not taxable. Rather, each such beneficiary includes a share of the trust's net income in the beneficiary's taxable income. A trust cannot distribute a net loss to the beneficiaries, the loss is carried forward to offset against net income in later years.
Where a presently entitled beneficiary is under a legal disability (for example, under 18 years of age, a non-resident, or incapable of managing his/her own affairs), the trustee is taxable on the beneficiary's share of the trust's net income. The tax rates correspond to the tax rates that would otherwise be payable by the beneficiary.
Where no beneficiary is presently entitled to part of the trust's net income, the trustee is taxable. The tax rates depend on the trust's particular circumstances, for example income of deceased estates attracts a different tax rate depending on the stage of administration of the estate.
Superannuation funds
A superannuation fund is a distinct legal entity with its own income tax liability and is required to lodge an income tax return. Different income tax return forms are used by self-managed superannuation funds and other superannuation funds. The superannuation fund tax rate is generally 15%. Higher rates apply to net non-arm's length income, and contributions by or on behalf of a member who has not quoted his/her tax file number to the trustee.
The Medicare Levy is a tax Australian residents pay to cover health care charges. It is payable on taxable income, in addition to income tax. Individuals and families on higher incomes who do not have an appropriate level of private hospital cover may have to pay the Medicare levy surcharge.
For the 2014-15 and later income years, Medicare Levy is usually calculated at 2% of taxable income. A reduction in the rate is available for people on low incomes and an exemption is available for people in certain categories. A Medicare Levy Calculator is available on the Australian Taxation Office (ATO) web site to help you work out your obligation.
The government-funded Paid Parental Leave scheme provides financial support for parents to take up to 18 weeks off work following the birth or adoption of a child, with pay at the National Minimum Wage. Employers receive funds from the Department of Human Services and pay eligible employees in the same way they would normally pay salary or wages.
From 1 January 2013 the scheme was expanded to include Dad and Partner Pay, which provides eligible working dads or partners with up to two weeks of pay at the National Minimum Wage. Dad and Partner Pay is paid directly to the claimant.
Pay As You Go (PAYG) Instalments is a system for paying instalments during the income year towards an entity's or individual's expected tax liability on business and investment income. The actual tax liability is worked out at the end of the income year when the annual income tax return is assessed. PAYG instalments paid during the year are credited against the assessment to determine whether the entity or individual owes more tax, or is owed a refund.
The Australian Taxation Office (ATO) will contact entities and individuals who are required to pay PAYG instalments, notifying them of their instalment rate. This is calculated according to information in the last assessed income tax return. PAYG instalments may be included as part of an activity statement, or a separate instalment notice may be issued.
The default option is for the instalment to be calculated as the instalment rate multiplied by business and investment income for the instalment period. The main advantage of this method is that instalments are based on income as the entity or individual earns it, instead of a projection based on the previous tax situation. Some entities, and all individuals, may however choose to pay an instalment amount calculated by the ATO, which is based on the most recent tax assessment plus an uplift factor. This decision needs to be made before the due date for payment of the first instalment for each income year, and then applies for the remainder of that year.
Entities and individuals can vary an instalment if they believe the instalment rate, or the ATO calculated instalment, will result in paying more or less than the expected tax liability for the year.
Individuals
PAYG instalments for individuals are generally paid quarterly but under certain circumstances a different lodgement cycle may be offered. For more information see Starting PAYG instalments. A special two instalment option is available to some primary producers and special professionals (e.g. sportspersons, artists, inventors and authors).
Partnerships and trusts
Partnerships and trusts are generally not required to pay PAYG instalments. However, special rules apply to partners and beneficiaries when calculating their own PAYG instalments.
Companies
Corporate tax entities with annual turnover above a threshold are required to pay monthly PAYG instalments. Other corporate tax entities are required to pay quarterly instalments. Companies can choose to pay an annual instalment if they meet the criteria that apply to individuals noted above, plus some additional conditions.
Superannuation funds
PAYG instalments for superannuation funds are generally paid quarterly. Superannuation funds can choose to pay an annual instalment if they meet the criteria that apply to individuals noted above.
Pay as you go (PAYG) withholding is a system for withholding amounts from payments to employees and businesses. An entity will have withholding obligations if the entity:
- Has employees, including company directors and officeholders
- Has other workers such as contractors, and voluntarily agrees to withhold tax from payments to them
- Makes payments to other businesses, if they don't quote an Australian business number (ABN) to the entity
If you are an employer or run a business and withhold amounts from payments, you need to:
- Register for PAYG withholding
- Register as an employer of working holiday makers (417 or 462 visa's) if applicable.
- Withhold amounts from wages and other payments
- Lodge activity statements and pay the withheld amounts to the Australian Taxation Office (ATO)
- Provide payment summaries to employees and other payees
- Provide the ATO with an annual report once each income year has ended.
The Australian Taxation Office (ATO) provides a variety of rate tables, tax calculators, and other tools on many topics, including the following:
- Capital gains tax
- Fringe benefits tax
- Fuel tax credits
- Goods and services tax
- Income tax
- PAYG withholding
- Superannuation
MORE: To access these tools, navigate to the Calculators & Tools section of the ATO web site.
Top 10 tips to help rental property owners avoid common tax mistakes
Whether you use a tax agent or choose to lodge your tax return yourself, avoiding these common mistakes will save you time and money.
Click here to view the top 10 tips on the ATO website
Small businesses with an annual turnover of less than $2 million may qualify for a range of tax concessions. If your business is eligible you can use the concessions that suit you. You may have to satisfy additional conditions and will need to check whether you qualify for the concessions each tax year.
Eligible businesses can use the concessions outlined in the table.
| CGT 15-year asset exemption | If you are 55 or older and retiring and your business has owned an asset for at least 15 years, you won't pay capital gains tax when you sell the asset. |
| CGT 50% active asset reduction |
If you have owned an asset to conduct your business you will only pay tax on 50% of the capital gain when you sell the asset. For individuals (including partners in partnerships and beneficiaries of trusts), this reduction applies in addition to the standard* 50% CGT discount, thereby reducing the taxable amount to 25% of the capital gain. * For foreign or temporary residents, a reduced CGT discount between 0-50% applies depending on individual circumstances. |
| CGT retirement exemption | There is CGT exemption on the sale of a business asset (up to a lifetime limit of $500,000). If you are under 55, money from the sale of the asset must be paid into a complying superannuation fund, or retirement savings account. |
| CGT rollover | If you sell a small business asset and buy a replacement, you can roll over your CGT liability to the value of the replacement asset. This means you won't pay any CGT owing until you sell the replacement asset. |
| Simpler depreciation rules | You can usually pool your assets to make depreciation calculations easier. You can also claim an immediately write off the cost of each asset that cost less than the instant asset write off threshold amount. There have been some recent changes to the instant asset write off threshold and eligibility so please refer to the ATO website for the latest information. |
| Simpler trading stock rules | If the value of your trading stock has not increased or decreased by more than $5,000 over the year, you can choose whether or not to do an end-of-year stock take. |
| Immediate deduction for certain prepaid business expenses | You can claim an immediate deduction for prepaid business expenses if the payment covers a period of 12 months or less and ends in the following income year. |
| Two-year amendment period | The time limit for the Commissioner or the taxpayer to amend an income tax assessment of an individual or small business is two years, instead of the standard four years. |
| Accounting for GST on a cash basis | You don't need to account for GST on a sale you make until you receive payment for the sale. Equally, input tax credits for purchases can only be claimed when you have paid for the purchase. |
| Annual apportionment of GST input tax credits | If you purchase items you use partly for private purposes, you can claim full GST credits for these on your activity statements. You can then make a single adjustment to account for the private use percentage at the end of the year. |
| Paying GST by instalments | You can pay GST by instalments the ATO calculates for you and can vary this amount each quarter if required. |
| FBT car parking exemption | In some cases you may be exempt from FBT for employee car parking. |
| PAYG instalments based on GDP amount | To save you working out your instalments based on actual income each quarter, all individuals and small business entities can pay fixed quarterly instalment amounts as calculated by the ATO based on their business and investment income in their most recently assessed tax return. |
