Understanding the Payroll Taxation Structure in Australia
Do you run a business in Australia? If so, you already know just how complicated the process of running a payroll can be. The structure is complicated and can vary depending on the industry that you work in, as well as the number of employees. Here’s a simple rundown to help you understand Australian payroll.
Australian Payroll Structure
The payroll structure in Australia is a fairly straightforward one. It’s split into different components in order to ensure that the money is paid out in the most appropriate manner. Simply put, the full amount of tax that you need to pay is already calculated when you take into account your tax bracket when you first input your taxes for the year. Your tax bracket is calculated based on the total amount of pay that you will likely earn in the year. This number is used to calculate the amount of tax that you need to pay per paycheck.
Your employer will then take the amount of tax that they owe and pay it to the Australian Tax Office (ATO) on your behalf. This is done on a monthly basis regardless of whether or not you are paid monthly. This is how your tax bracket is determined.
There are three components that make up an Australian employee’s pay: The PAYG (Pay As You Go) component, the Superannuation component, and the Fringe Benefits Tax component.
PAYG (Pay As You Go) - The first component is the PAYG component. The PAYG component is basically your tax that is withheld from your wages. This method is used to determine how much tax you will pay during the year and is what makes up your tax bracket.
Superannuation - The next component is the superannuation component. Superannuation is paid to employees as a way to help prepare them for retirement. Superannuation is not mandatory, but many people choose to pay into a fund due to government incentives.
Fringe Benefits Tax (FBT) - The Fringe Benefits Tax component is how you go about claiming the money that you spent on your employer through fringe benefits. There are special tax laws that allow you to retain these benefits, and the money that you spend on them is tax-free, but only if you claim it.
Income Tax in Australia
The main tax that you will be most concerned with is the income tax in Australia. There are two different income taxes in Australia: personal income tax and corporate income tax.
Personal Income Tax
The personal income tax is the money that you pay on your personal wage and salary income. This is calculated at a rate of 19% on your income between $18,201 and $45,000, at 32.5% between $45,001 and $120,000, and at 37% on anything above $120,000.
These tax rates are subject to change every year, so be sure to look out for them. Please take note that the above rates do not include the Medicare levy of 2%.
Corporate Income Tax
Corporate income tax is charged on the company profits. This means that not all businesses have to pay income tax. Those who do not have to pay income tax are referred to as government companies or government exempt entities, including banks, Australian state and territory governments, and some charitable organisations.
If you are a resident of Australia, you are taxed at your resident rate. If you are not a resident of Australia, you are taxed at your deemed rate, which is your worldwide income tax rate.
If you are a company that employs workers in Australia, you will have to pay your earned income on a PAYG basis. You can also claim a salary expenses amount that is the lower of either the salary that you pay your employee or the salary that the employee actually earns.
Australian Payroll is a fairly simple process that requires you to be a little more in tune with the tax code than most other countries. Being aware of the tax bracket that you fall into ensures that you’re paying the proper amount of tax. This way, you can use the tax code to your advantage to make sure that you’re saving as much money as possible.
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