The company tax rate is a flat 30%, though through the Dividend imputation system Australian residents effectively do not pay this company income tax upon the profits distributed as dividends by Australian-resident corporations.
When an Australian corporation pays corporate income tax, 'franking credits' are generated and can then be applied to dividend payments at a maximum rate of 30 cents per dollar of dividend. Shareholders may then use these credits to offset their own personal income tax payable, including claiming a refund for excess credits left over after offsetting all payable income tax.
Capital Gains Tax
Capital gains tax in Australia is part of the income tax system rather than a separate tax. Net capital gains (after concessions are applied) are included in a taxpayer's taxable income and taxed at marginal rates. Capital Gains applies to Individuals, Companies and any other entity which can legally own an asset. Trusts usually pass on their CGT (Capital Gains Tax) liability to their beneficiaries. Partners are taxed separately on the CGT made by partnerships.
In 1999 indexation on capital gains ceased and subsequently gains on assets held for more than one year are usually reduced by a discount of 50% for individuals, and 33% for superannuation funds. However, in some cases where an indexed cost base applies (where an asset was acquired before indexation ceased) applying the old indexation rules gives a better tax result. Capital gains realised by companies are not discounted. Capital gains made by trust structures are usually taxed as if they were made in the hands of the ultimate beneficiary, though there are exceptions.
The disposal of assets which have been held since before 20 September 1985 (pre-CGT assets) is exempt from CGT.
Family Tax Benefit
For families with dependent children the income tax system includes a supplementary set of rules known as Family Tax Benefits (FTB) that are applied in a more complex way. The benefits and thresholds for FTB vary depending on the number of children and which of the married partners earns the additional income.
There are two key components relating to total family income (FTB-A) and relating to the income of the lower income earner (FTB-B). In essence low income families receive a government benefit of around $6000 per annum per child and this benefit is phased out at varying rates depending on whether extra income is earned by the higher or the lower income earner. The combined phase out rate varies between 20% and 50% (combining part A and part B). The total effective marginal tax rates for families (once these benefit phase outs are combined with the normal rates of tax on income) are often as high as 75%. In essence for some families out of each additional dollar they earn they are only allowed to retain 25 cents. The impact of Family Tax Benefit thresholds generally affects all families with a combined income under $100,000 but also affects many families with higher incomes.
The work disincentive effect of the high effective marginal tax rates produced by the Family Tax Benefit rules have been widely criticised in the media as well as by opposition parties and even on occasion by members of the government.