What is tax?

Who pays for what? |  How do I pay tax? |  What's left? |  Why do I need to pay tax?

There's no getting away from it. If you earn an income you will generally need to pay tax. But a 'taxpayer' can also be another 'entity', like a business. And if that entity also earns income, it will generally need to pay tax as well.

Taxes are a way of making sure that the government is able to provide facilities, infrastructure and services for the community. Without tax, many parts of our society wouldn't function. Services like libraries, public health and hospitals, schools, swimming pools, national parks, our defence force, roads and social security allowances are all funded through taxes.

Local, state, federal . . . Who pays for what?
There are three levels of government in Australia – starting with local councils, then state and territory governments and finally the federal government. These levels of government are responsible for different areas, and each collects different taxes.

For example, your local council uses the tax it collects to pay for kerbs and gutters, sports areas and parks, libraries and collecting your garbage. State governments look after health facilities, water, roads, power, education and police, among others. The federal government uses tax to provide for social security, budgets, defence, trade, communications, immigration and more.

You can't decide how your money is used, but you can see how the levels of government plan to use it by examining their budgets, and taking note of what is going on in your local area.

How do I pay tax?
As an individual, your main contribution will be through income tax.  For the federal government, the revenue generated by income tax is the most important part of its funding. It is derived from individuals' wages, salaries, realised gains and profits on sales of assets. (Income tax is also sourced from business, however businesses and individuals pay different rates of tax.)

How much tax you pay as an individual is based on how much money you earn. It's calculated at progressive rates, where different 'bands' or ranges of income have different rates – so that the more you earn, the higher the effective rate you pay, and the less you earn, the lower the effective rate you have to pay. Want to find out how much tax you should be paying? You can do so here.

If you are working for someone else, tax is taken out of your regular pay by your employer, who pays it to the Tax Office on your behalf. By doing it in increments, it saves being hit in one go at the end of the tax year. This is known as the 'pay-as-you-go' system, or PAYG.  It is used to collect income tax, Higher Education Loan Program (HELP) repayments and Medicare levy payments. There are actually two types of PAYG – withholding (for individuals) and instalments (for businesses) – although individuals also sometimes have to pay instalments if they pass certain investment income thresholds. You can find out more about PAYG by clicking on the links.

What's left?
The remainder of Australia's taxation revenue comes from indirect taxation, including the goods and services tax (or GST); property taxes, and excise and customs duties.  Some of these taxes go to local and state governments, and some tax rates differ between states. These indirect taxes are paid by individuals and businesses.

What do I need to do to pay tax?
Your 'residency' status for tax purposes is very important. Determine if you are a resident for tax purposes?

You'll need a tax file number (TFN) – without one, you'll end up paying more tax.

I'm under 18 years of age – do I pay the same amount of tax as adults?

Last reviewed 8/08/2012