Australia's Future Tax System

Architecture of Australia's tax and transfer system

2.11 Additional tax and transfer tables (continued)

Table 2.10: Major tax offsets, 2006‑071

Offsets Value of entitlement
($ million)
Number of individuals receiving

The low income tax offset is designed to reduce the tax paid by Australian low‑ and middle‑income earners. In 2006‑07, the maximum offset of $600 was available to taxpayers who earned less than $25,000. In 2007‑08, the maximum value of the offset increased to $750, and was available to taxpayers who earned less than $30,000. In 2008‑09 it has been further increased to $1,200 and will rise to $1,350 and $1,500 in 2009‑10 and 2010‑11 respectively.

2,168 5,195,500

The lump sum payment in arrears tax offset is available to taxpayers who include in their assessable income a lump sum payment for unused annual leave or for unused long service leave which is categorised as 'eligible assessable income'.

The eligible termination payment tax offset applies to limit the maximum rate of tax applied to the taxed and untaxed elements of a post‑June 1983 component of an eligible termination payment.

1,322 196,300

The superannuation contribution annuity and pension tax offset is applied to taxable annuity or pension income included in a taxpayer's tax return at a rate of 15%.

1,150 431,300

The senior Australians tax offset (SATO), when combined with the low income tax offset, ensured that eligible single older Australians could have income up to $24,867 in 2006‑07 without paying income tax or the Medicare levy. As part of the Government's plan to reduce income taxes, this amount has increased to $28,867 in 2008‑09, and will increase to $29,867 for 2009‑10 and $30,685 for 2010‑11.

Similarly, a senior Australian who is a member of a couple could earn up to $20,680 for 2006‑07 without paying income tax or the Medicare levy. This amount has increased to $24,680 in 2008‑09 and will increase to $25,680 for 2009‑10 and $26,680 for 2010‑11.

1,083 604,800

The mature age worker tax offset is aimed at encouraging older workers to remain working or rejoin the workforce. The offset is available to workers aged 55 years and over who have net income from working2 of less than $63,000. The maximum offset has been $500 since it became available on 1 July 2004.

491 1,147,700

The dependent spouse tax offset is available to taxpayers who maintain a dependent spouse but not during periods in the income year where either they or their spouse are eligible for Family Tax Benefit Part B. The maximum spouse offset available was $1,655 in 2006‑07. In 2007‑08 it was increased to $2,100 and is indexed annually.

452 344,700

The pensioner tax offset is available to taxpayers who are not entitled to the senior Australians tax offset and who receive certain pension payments. The effect of the offset is to ensure that no tax is paid by a person whose assessable income consists of the full pension and, in some cases, a small amount of non‑pension income.

In 2006‑07, the maximum amount of the pensioner tax offset was $2,018 for singles, $1,522 for each member of a couple or $1,879 for a person who is a member of a couple separated by illness. These amounts are increased annually in line with pension increases.

444 285,300

The medical expenses tax offset is available to taxpayers for net medical expenses over $1,500 at a flat rate of 20%. No upper limit is applied.

401 642,500

The child care tax rebate is available to taxpayers for the difference between fees incurred for approved child care and the Child Care Benefit (30% of the difference). The maximum amount of rebate was $4,211 in 2006‑07. The rebate has risen to 50% with a maximum amount of $7,500 in 2008‑09 and is delivered through the Family Assistance Office.

344 436,800

The zone and overseas forces tax offset is available to individuals who are classed as residents of specified remote areas (Zone A or Zone B) of Australia for more than half the income year, or are serving in a qualifying overseas locality as a member of the Australian Defence Force.

A resident of a special area of either Zone A or Zone B is entitled to an offset of $1,173 plus 50% of the relevant rebate amount. A resident of ordinary Zone A and a Defence Force member serving in a qualifying overseas locality is entitled to a zone tax offset of $338 plus 50% of the relevant rebate amount. A resident of ordinary Zone B is entitled to a zone tax offset of $57 plus 20% of the relevant rebate amount.

225 530,800

The baby bonus (first child) tax offset is available to taxpayers for the first child for whom legal responsibility is taken between 1 July 2001 and 30 June 2004, where the child was under 5 years when legal responsibility was taken. Over the next five years, some or all of the tax paid by the mother in the income year prior to the gaining of the legal responsibility of the child is refunded through instalments. Taxpayers claiming this offset must lodge their claim by 30 June 2009.

176 304,100

The private health insurance rebate is worked out as a percentage of the premium paid to a registered health insurer for a complying private health insurance policy. Taxpayers are able to choose to claim a certain percentage of the cost of their private health insurance premiums as a tax offset or as a direct payment or reduced health insurance premiums. Taxpayers aged less than 65 years can claim a 30% tax offset, those aged between 65 and 69 can calm 35% and those 70 years or older can claim 40%.

168 253,500

The entrepreneurs' tax offset is equal to 25% of the income tax liability attributable to the business income of small businesses entities with an aggregated turnover of less than $75,000. The offset phases out where the aggregated turnover for a year is between $50,000 and $75,000.

145 295,300

The beneficiary tax offset is paid to taxpayers whose assessable income includes certain government 'benefit' payments, and is calculated on the benefit income returned in their tax return.

124 266,900
  1. Data current for 2006‑07 tax returns processed as at 25 June 2008
  2. The income test that applies to the mature age worker tax offset is defined as net income from working. This concept captures personal services and business income associated with employment and reduces it by a taxpayer's deductible expenses relating to the generation of this income.

Table 2.11: Taxable component of a superannuation benefit — taxation of element taxed in the fund

Age Superannuation lump sum Superannuation income stream
60 and above Tax free (non‑assessable, non‑exempt income) Tax free (non‑assessable, non‑exempt income)
Preservation age to age 59 Zero per cent up to the low rate cap of $145,000 (indexed); 15 per cent on amounts above the cap Marginal tax rates, less a 15 per cent offset
Below preservation age 20 per cent Marginal tax rates

Table 2.12: Taxable component of a superannuation benefit — taxation of element untaxed in the fund

Age Superannuation lump sum Superannuation income stream
60 and above 15 per cent up to the untaxed cap of $1.045 million (indexed), and then at the top marginal tax rate Marginal tax rates, less a 10 per cent offset
Preservation age to age 59 15 per cent up to the low rate cap of $145,000 (indexed), 30 per cent up to the untaxed cap of $1.045 million (indexed),
and then at the top marginal tax rate
Marginal tax rates
Below preservation age 30 per cent up to the untaxed cap of $1.045 million (indexed), and then at the top marginal tax rate Marginal tax rates

Table 2.13: Overview of the tax treatment of outbound investment

Investment type Income Capital gains
Direct investment
(non‑portfolio investment,
that is an equity interest
of greater than 10 per cent in foreign branches or companies)

Resident investor is an Australian company

As earned: active business income exempt; passive income taxed under anti‑tax‑deferral rules, with credit for foreign tax paid.

On distribution: exempt (irrespective of whether active or passive income).

Resident investor is not an Australian company

As earned: taxed, unless active income derived by foreign company.

On distribution: taxed with credit for direct foreign taxes, unless income was previously subject to tax under anti‑tax‑deferral rules.

Resident investor is an Australian company

Capital gain from disposal of interest in a foreign company that has more than 90% active assets is exempt.

Resident investor is not an Australian company

Capital gain from disposal of interests in foreign company is taxed, with credit for foreign taxes paid.

Portfolio equity

All resident investors

As earned: taxed as derived by the foreign entity or, under anti‑tax‑deferral rules (unless exemption available). In some cases, credit for foreign taxes paid by foreign entity may be available.

On distribution: taxed, with credit for any direct foreign taxes, unless income has been previously taxed under anti‑tax‑deferral rules.

All resident investors

Capital gain taxed unless it represents income that has been previously taxed (eg. under anti‑tax‑deferral rules)

Portfolio debt

All resident investors

Taxed with credit for foreign interest withholding tax.

All resident investors

Generally not applicable.

Table 2.14: Overview of the tax treatment of inbound investment

Investment type Income Capital gains
Direct investment

Company income tax — 30% on taxable income of Australian companies and branches of foreign companies.

Unfranked dividends of Australian companies (paid from untaxed or tax preferred income) — dividend withholding tax (30% if non‑treaty; generally 0‑15% if treaty) unless conduit foreign income.

Royalties from Australian company — royalty withholding tax (30% if non‑treaty; generally 5‑15% if treaty).

Other Australian source income derived by non‑resident directly (eg. investment in Australian land) — taxed on assessment at relevant tax rate.

Capital gains from the sale of shares in Australian company not taxed unless the company is land‑rich.

Capital gains from the sale of business assets of an Australian permanent establishment taxed.

Capital gains from the sale of Australian land and non‑portfolio interests in land‑rich entities taxed.

Portfolio equity

Company income tax — 30% on taxable income.

Unfranked dividends — subject to dividend withholding tax (at 30% if non‑treaty; 10‑ 15% if treaty) unless conduit foreign income.

Certain distributions from managed investment trusts — subject to new withholding tax regime. Once fully implemented, residents of countries with which Australia has effective exchange of information will be subject to 7.5% withholding tax; other foreign residents will be subject to 30% withholding tax.

Distributions of net income from other trusts — taxed at non‑resident investor's tax rate.

Capital gains on sale of shares not taxed.

Capital gains from sale of other interests not taxed unless non‑portfolio interests in land‑rich entity.

Portfolio debt

Interest — subject to interest withholding tax (at 10%) unless exemption available (either under domestic law or treaty).

Generally not applicable.