Tax and other deductions
Most people don't get to keep all of the money they earn. They have to pay tax, which is a percentage of their income paid to the government based on their taxable income. Taxes are used to fund public projects like schools, hospitals and roads. Depending on where you work, each year you or your employer will have to lodge a tax return, so knowing how to calculate your taxable income is important.
You'll need to know the difference between your gross income and your net income. Your gross income is all the money you earn. Your net income is the amount you actually get paid after tax is taken out. Think of this fishing analogy to help you remember: if you lifted your net out of the gross ocean, all the tax and deductions would drain away and all that would be left in the net is the big, juicy amount of money you get paid.
Gross income: the amount of income you receive before tax and deductions.
Net income: the amount of income you receive after tax and deductions.
Taxable income: the income you are required to pay tax on.
Tax rates: The different tax amounts people are required to pay. This varies depending on your taxable income.
Deductions: expenses that are directly related to earning your income which you are allowed to subtract from your gross income. These include uniform expenses, vehicle and travel expenses, self-education expenses, as well as charitable donations.
Medicare levy: a tax of $1.5%$1.5% of one's taxable income paid by most Australian taxpayers that is used to provide Australian residents with access to public health care.
Calculating your income
Each pay period (whether it's weekly, fortnightly or monthly), your employer will take out a percentage of your income as tax, which is based on your gross income. This is known as PAYG or 'pay as you go'. However, you may have deductions that you can subtract from your gross income, which in turn will reduce your taxable income. If this is the case, and you have paid more tax than you needed to, you may be eligible for a tax return at the end of the financial year.
However, prior to lodging tax returns, it's also helpful to be able to calculate your net income, so you know how much money you will actually receive each pay period. To do this, you need to subtract the amount of tax you are required to pay from your gross income. Then you can divide this net amount to find your weekly net wage, monthly net wage etc.
Worked example
example 1
Calculate the net weekly wage of a carpenter who must pay $16%$16% tax on an annual salary of $\$38080$$38080. Give your answer correct to two decimal places.
Think: What would his annual net salary be? Remember that there are $52$52 weeks in a year.
Do: His annual net salary would be $100-16$100−16, or $84%$84% of his gross income:
$0.84\times38080=\$31987.20$0.84×38080=$31987.20
Then, to calculate his net weekly income:
$31987.20\div52=\$615.14$31987.20÷52=$615.14
Practice questions
Question 1
Consider Pauline's taxable income of $\$127$$127$810$810.
| Taxable income | Tax on this income |
|---|---|
| $0-\$18200$0−$18200 | Nil |
| $\$18201-\$45000$$18201−$45000 | $19c$19c for each $\$1$$1 over $\$18200$$18200 |
| $\$45001-\$120000$$45001−$120000 | $\$5092$$5092 plus $32.5c$32.5c for each $\$1$$1 over $\$45000$$45000 |
| $\$120001-\$180000$$120001−$180000 | $\$29467$$29467 plus $37c$37c for each $\$1$$1 over $\$120000$$120000 |
| $\$180001$$180001 and over | $\$51667$$51667 plus $45c$45c for each $\$1$$1 over $\$180000$$180000 |
By filling in the gaps, state the range of taxable incomes (income bracket) that Pauline's taxable income falls into.
Range of taxable incomes$=$=$\$$$$\editable{}$$-$−$\$$$$\editable{}$
Fill in the gaps to complete the calculation for the income tax payable.
Income tax payable on $\$127810$$127810 is $\editable{}+\left(127810-\editable{}\right)\times\editable{}$+(127810−)× dollars
Question 2
Sharon is a project manager with a taxable income of $\$127$$127$192$192.
Throughout the year, her employer has deducted $\$691$$691 per week in tax instalments.
The income tax rates for individuals are provided in the table.
| Taxable income | Tax on this income |
|---|---|
| $0-\$18200$0−$18200 | Nil |
| $\$18201-\$45000$$18201−$45000 | $19c$19c for each $\$1$$1 over $\$18200$$18200 |
| $\$45001-\$120000$$45001−$120000 | $\$5092$$5092 plus $32.5c$32.5c for each $\$1$$1 over $\$45000$$45000 |
| $\$120001-\$180000$$120001−$180000 | $\$29467$$29467 plus $37c$37c for each $\$1$$1 over $\$120000$$120000 |
| $\$180001$$180001 and over | $\$51667$$51667 plus $45c$45c for each $\$1$$1 over $\$180000$$180000 |
Calculate the tax payable to the nearest cent.
Calculate the Medicare Levy, which is $2%$2% of taxable income.
Since Sharon's employer has deducted more than is needed from her income, Sharon is entitled to a refund for the year.
Find the amount of this refund correct to the nearest cent.