Individual - Income determinationLast reviewed - 07 December 2022
Gross assessable income of an employee includes cash remuneration arising from employment. Cash remuneration includes salaries, wages, commissions, bonuses, pensions, and allowances paid to employees.
Resident individuals are subject to Australian tax on their overseas employment income, unless special exemption requirements are met. However, tax treaties are in force with various countries, and provisions in those treaties may require a different tax treatment of certain employment income.
Resident individuals are liable to Australian tax on income derived from all sources, including foreign employment income. Salary and wages derived by resident individuals, in performing duties overseas for a continuous period of at least 91 days, are only eligible for exemption from income tax if the foreign service is directly attributable to specified activities (e.g. services directly attributable to the delivery of Australia's overseas aid program or deployment as a member of a disciplined force) and provided the earnings are not exempt from tax in the foreign country in which they are earned.
Foreign nationals are generally taxable on salary and allowances relating to services performed in Australia, regardless of where the payment is made and whether the income is remitted to Australia.
Non-employee resident taxpayers are subject to tax on non-cash business benefits.
However, for non-cash benefits provided to employees, employers are currently liable for an FBT that is levied at 47% of the taxable value multiplied by a gross-up factor of the fringe benefits granted to employees. The gross-up factor is 2.0802 for 'type 1 aggregate fringe benefits', i.e. fringe benefits which, subject to certain exceptions, the employer was entitled to an input tax credit for GST. The gross-up factor is 1.8868 for other fringe benefits, which are referred to as 'type 2 aggregate fringe benefits'. FBT is generally deductible by the employer for income tax purposes.
Benefits subject to FBT are excluded from the employee's taxable income, but may be taken into account (as reportable fringe benefits) when determining the employee's liability for tax surcharges such as the Medicare levy surcharge and income-related obligations such as child support, and entitlement to certain tax offsets.
Special rules govern the tax treatment of employee share schemes (ESS).
Under these rules, tax is imposed on the discount on shares and rights/options issued to an employee (or associate) under an ESS in the income year in which the shares or rights/options are acquired.
An annual exemption threshold of AUD 1,000 is available to employees where the scheme meets certain conditions (including being non-discriminatory), and is only available for employees whose taxable income (after adjustments taking into account reportable fringe benefits, total net investment losses, and reportable superannuation contributions) does not exceed AUD 180,000.
There is an ability to defer the imposition of tax, subject to meeting certain conditions. For ESS shares awarded from 1 July 2015, the taxing point is the earliest of:
- when there is no real risk of forfeiture of the shares and any restrictions on the sale are lifted
- when the employee ceases employment (but only where this occurs before 1 July 2022), or
- 15 years after the shares were acquired.
In the case of options granted from 1 July 2015, discounted options will generally be taxed the earliest of:
- when there is no real risk of forfeiture of the rights and any restrictions on the sale of the rights are lifted
- when the employee exercises the right, and after exercising the right there is no real risk of forfeiture of the underlying share and the restrictions on sale of the share are lifted
- when the employee ceases employment (but only where this occurs before 1 July 2022), or
- 15 years after the rights were acquired.
Tax deferral is also available for ESS interests received at a 100% discount under certain salary sacrifice arrangements where the employee receives ESS interests of not more than AUD 5,000 worth of shares under those arrangements in an income year (other conditions must also be met).
Further concessions apply to options or shares provided by 'eligible start-up companies' (broadly an unlisted company that was incorporated for less than ten years and with aggregated turnover of no more than AUD 50 million). These concessions include an income tax exemption on the discount on certain shares and a deferral of income tax on the discount on certain rights until exercise or sale under the capital gains tax rules.
The disclosure and licensing requirements have been simplified for many companies where companies do not lend or charge to employees to whom they offer ESS interests and for unlisted companies that make ESS offers valued at up to AUD 30,000 per employee on offers over a 12-month period, plus an additional 70% of any dividends and 70% of cash bonuses received in that year.
In general, and subject to Australia's double tax treaties, Australian residents are subject to tax on all discounts they receive in respect of shares and rights/options acquired under an ESS regardless of whether it is received in relation to employment in Australia or outside Australia. Foreign residents are only subject to Australian tax on discounts they receive in respect of shares and rights/options acquired under an ESS to the extent that the discount relates to the employment in Australia (e.g. because the employee works in Australia during all or part of the vesting period).
The rules also include annual employer reporting obligations both in the year of acquisition of shares or rights/options, and in the year of income in which the taxing point on deferred shares or rights/options arise.
WHT will apply where an employee fails to provide their employer with a 'tax file number' (TFN) by the end of the income year in which any applicable discount is subject to Australian tax.
Income from a trade, business, profession, or vocation derived by an individual is assessable. The individual will be able to claim a deduction for expenditure incurred in gaining or producing the income or which is necessarily incurred in carrying on a business for the purpose of gaining or producing the income (not being expenditure of a private, capital, or domestic nature). Entitlement to a deduction for certain motor vehicles or travel expenses will, however, depend on satisfying the particular record keeping requirements of the substantiation provisions.
Capital gains tax (CGT) applies to assets acquired on or after 20 September 1985. Capital gains made upon the realisation of such assets are included in assessable income and are taxed at ordinary rates of tax. Capital losses are offset only against capital gains (and are applied to any capital gains before discounting) and cannot be offset against other income.
If the asset was acquired on or after 11:45 am AEST on 21 September 1999 and has been held for at least 12 months, a discount applies such that 50% of the nominal gain (with no indexing of costs for inflation) is included in the individual's taxable income. The CGT discount for resident individuals who invest in qualifying affordable housing is 60%. A non-resident individual is not entitled to the discount on capital gains accrued after 7:30 pm AEST on 8 May 2012.
If the asset was acquired before 11:45 am AEST on 21 September 1999 and was held for at least 12 months, an individual has a choice of calculating the assessable capital gain using the discount method or the indexation method (i.e. 100% of the gain calculated after allowing for inflation based on the CPI of costs incurred up to 30 September 1999, but not beyond that date). In calculating capital losses, there is no indexation.
Residents of Australia, except temporary residents, are liable for the tax on gains from the disposal of assets wherever situated, subject to a tax offset for foreign tax paid.
Non-residents are subject to Australian CGT only where the asset is 'taxable Australian property', that is broadly, Australian real property, or the business assets of Australian branches of a non-resident. Australian CGT also applies to 'indirect Australian real property interests', i.e. non-portfolio interests in interposed entities (including foreign interposed entities), where the value of such an interest is wholly or principally attributable to Australian real property. 'Real property' for these purposes is consistent with Australian treaty practice, extending to other Australian assets with a physical connection with Australia, such as mining rights and other interests related to Australian real property. A 'non-portfolio interest' is an interest held alone or with associates of 10% or more in the interposed entity.
Net capital gains are calculated in the same way for non-residents as it is for residents (except for the 50% discount that is not available for capital gains accrued after 7:30 pm AEST on 8 May 2012 as noted above) and are included in the assessable income of the non-resident.
Although a non-resident is not required to notify the Australian revenue authorities of a disposal at the time the asset is sold, a non-final 12.5% WHT applies to the gross proceeds of the sale of taxable Australian property by non-residents (other than for a real property transaction under AUD 750,000). Disclosure is made upon lodgement of the tax return, and any amounts withheld are creditable against any actual income tax liability.
Where a non-resident becomes an Australian resident, capital assets owned by the non-resident (other than assets acquired before 20 September 1985 and taxable Australian property) are deemed to have been acquired by the non-resident for a consideration equal to the market value of the assets at the time residence commences. Special provisions also apply where a resident individual ceases to be a resident, so that assets which are not taxable Australian property are deemed to be disposed of, unless an election to the contrary is made. An exception to this rule applies for temporary residents.
The CGT main residence exemption does not apply to foreign residents. However, in cases where the residence is sold as a result of a 'life event' relating mainly to health and family matters, the exemption can apply where the individual has been a tax non-resident of Australia for a period of six years or less.
A dividend imputation system designed to prevent the double taxation of Australian corporate profits distributed to shareholders, applies to dividends paid out of Australian-taxed profits of resident corporations (franked dividends). Resident individual shareholders receiving franked dividends are entitled to a 'franking offset' of Australian corporate tax paid on the profits reflecting the dividends. If a franking offset exceeds the tax payable by a resident individual, the excess is refundable to the individual.
Certain payments, loans, and debts forgiven by private companies to shareholders (or their associates) may be treated as an assessable (unfrankable) dividend to the extent that the company has realised or unrealised profits ('distributable surplus'). In addition, these deemed dividend rules cover circumstances where a shareholder (or associate) is permitted to use an asset owned by a private company, such as real estate, a car or boat for no fee or at a discounted rate.
Resident individuals are generally taxable on foreign-source dividend income but are eligible for a tax offset for foreign taxes paid on such income (see the Foreign tax relief and tax treaties section for more information).
Non-resident individuals receiving franked dividends are generally not entitled to a franking offset but are exempt from WHT on the dividends, and are exempt from WHT on unfranked dividends to the extent that the dividends are paid out of certain foreign-source income and gains, and the company has made a conduit foreign income (CFI) declaration in relation to the dividend.
WHT at the rate of 30% (although this rate may be reduced (usually to 15%) where a tax treaty applies) is imposed as a final tax on unfranked dividends paid to non-residents. WHT is usually withheld by the payer on behalf of the payee on the gross amount of the dividend and remitted to the Australian revenue authorities.
Resident individuals are subject to Australian tax on interest income from both Australian and foreign sources. A WHT on domestic interest payments by financial institutions and certain other investment bodies will apply to investors who fail to quote their tax file number to the financial institution in the manner required by the Commissioner of Taxation.
In relation to foreign-sourced interest income, resident individuals are generally eligible for a tax offset for foreign taxes paid on such income (see the Foreign tax relief and tax treaties section for more information).
WHT is imposed on interest paid to a non-resident to the extent that the interest is paid by a resident or is an expense of an Australian permanent establishment (PE) carried on by a non-resident. WHT is not imposed if the interest is derived by the non-resident in carrying on business through a PE in Australia. In that case, the interest will be subject to the ordinary rates of income tax.
The rate of WHT is 10% of the gross amount of interest paid, although this rate may be reduced in limited circumstances where certain tax treaties apply. The tax is usually withheld by the payer on behalf of the payee and remitted to the revenue authorities. WHT represents a final tax in Australia on the interest income.
Resident individuals are subject to Australian tax on the rental income derived from both Australian and foreign property. Non-resident individuals are subject to Australian tax on rental income derived from an Australian source. Gross rental receipts are included as assessable income in the individual's tax return. A deduction for expenses incurred in deriving such income will be allowed. Where the deductions exceed the rental income, the resultant loss may be offset against the individual's other income.
A deduction is not allowed for travel costs in connection with a residential investment property, including costs incurred to inspect and maintain the property, collect rent, or visit the real estate agent, even if that is the sole purpose of the travel. In addition, for any residential rental property acquired under contracts entered into after 7:30 pm AEST on 9 May 2017, depreciation deductions for items of plant and equipment (e.g. dishwashers, ceiling fans, carpet, and hot water systems) in residential investment properties are limited to those assets that have not previously been used.
Tax deductions are denied for expenses related to the holding of certain vacant land that is not used in carrying on a business for the purpose of producing assessable income. Vacant land does not include land on which there is a substantial and permanent structure or residential premises that is being constructed, or substantially renovated, but only where it is lawfully able to be occupied and is leased, hired, or licensed. There are exceptions to ensure that a land owner is not denied deductions when structures on the land are affected by natural disasters or exceptional circumstances, or when the land is owned by a primary producer or is subject to an arm's-length lease arrangement to an entity who carries on a business on the land.
Resident individuals are generally subject to Australian tax on foreign-source income while non-residents are exempt from Australian tax on foreign-source income.
In addition, certain foreign non-comparably taxed income, which is generally sheltered in low-tax countries through foreign companies controlled (directly or indirectly) by Australian residents may be attributed to Australian-resident controllers and taxed in Australia. Any income subject to taxation on attribution will be exempt from Australian tax when repatriated to Australia.
Under the controlled foreign company (CFC) rules, non-active income of foreign companies controlled by Australian residents (determined by reference to voting rights and dividend and capital entitlements) may be attributed to those residents under rules which distinguish between companies resident in 'listed countries' (e.g. Canada, France, Germany, Japan, New Zealand, the United Kingdom, and the United States) and in other 'unlisted' countries. In general, if the CFC is resident in an unlisted country and it fails the 'active income test' (typically because it earns 5% or more of its income from passive or 'tainted' sources), the CFC's 'tainted income' (very broadly, passive income and gains, and sales and services income that has a connection with Australia) is attributable. If a CFC is resident in a listed country, a narrower range of tainted income is attributed even if the CFC fails the active income test.
Foreign exchange gains and losses
Foreign currency gains and losses are recognised when realised regardless of whether there is a conversion into Australian dollars, and are included in or deducted from assessable income, subject to limited exceptions. There are exceptions to the timing and characterisation aspects of the realisation approach where the foreign currency gain or loss is closely linked to a capital asset.
To reduce compliance costs with foreign currency denominated bank accounts caused by the first-in, first-out (FIFO) approach mandated in the rules, taxpayers may elect to disregard gains or losses on certain low balance transaction accounts that satisfy a de minimis exemption, or may elect for retranslation by restating the balance of the account annually by reference to deposits, withdrawals, and exchange rates at the beginning and end of each year.
The taxation of financial arrangements (TOFA) rules, which generally apply to financial arrangements that start to be held on or after 1 July 2010, do not apply to individual taxpayers, other than those who elect to have the rules apply and to certain deferred interest securities. Where the rules apply, gains and losses from financial arrangements are generally recognised for tax purposes on an accruals basis or on a realisation basis.
Exempt income that is not subject to Australian tax includes:
- Certain salary and wages directly attributable to a limited class of activities (usually government aid programs and defence force personnel serving overseas), which were earned overseas, that are subject to tax in the country of derivation.
- Non-cash fringe benefits provided by an employer to an employee (such as use of a car, accommodation, low interest loans, etc.). These benefits are generally exempt from income tax in the hands of the employee, but the value of the benefit is taxed to the employer under the FBT system.
- Certain government pensions, scholarships, and bursaries.
The exempt income rules interact with other rules so that tax losses are offset against certain types of exempt income, and in some very limited cases the exempt income is aggregated with taxable income to determine the rate of tax on that taxable income.