Introduction
When earning money, there are a few things we need to keep track of in order to know how much money we have in the present and how much we will have in the future. While they may seem like complicated, adult-only topics, things like wages, income and tax are all quite simple in terms of mathematics.
Calculate the income
Income is the technical term describing how much money is earned. When finding out how much money will be earned from a standard job, there are two main forms that information can take.
A wage is a rate of money earned per time period, usually hourly. The total amount earned is determined by how many time periods you end up working.
Conversely, a salary is a set amount that is earned over a given time period. Since the total amount earned by a salary is fixed, you can calculate an equivalent wage based on how much time you work for.
In addition to wages and salaries, income can also be affected by bonuses or rate increases for working overtime. For example, 'double time' means that the usual wage rate is doubled.
Using these types of information and calculations, we can find a person's yearly income, which is also referred to as gross annual income. This value is important for when we want to start calculating tax.
Examples
Example 1
Derek is considering three different job offers, and wants to choose the one that will pay him the most, but they are all given at different rates:
-
Offer 1: \$2917.00 per month
-
Offer 2: \$955.73 per week
-
Offer 3: \$52\,170.00 per year
Find his annual income for job Offer 1 at \$2917.00 per month.
Find his annual income for job Offer 2 at \$955.73 per week.
Which job offer should Derek accept?
To convert an hourly wage to a weekly wage, multiply by the number of hours worked.
To convert a weekly wage to an annual salary, multiply the wage by 52.
To convert a monthly wage to an annual salary, multiply the wage by 12.
Taxable income and tax deductions
Taxable income is the amount of money earned in a year that the government uses to calculate tax. This amount represents the amount of money earned that a person can spend freely.
The money earned that is not spent freely can be referred to as tax deductions. Tax deductions include work related expenses and donations.
Taxable income can be calculated by subtracting tax deductions from the gross annual income.
\text{Taxable income} = \text{Gross annual income} - \text{Tax deductions}
There are different kinds of tax that need to be paid for different purposes.
Income tax is a public services tax that is calculated based on one's taxable income, in accordance with the different tax brackets.
Income tax in Australia is currently calculated according to the table below:
| Taxable income | Tax on this income |
|---|---|
| 0 - \$18,200 | \text{Nil} |
| \$18,201 - \$37\,000 | 19c\text{ for each } \$1 \text{ over } \$18\,200 |
| \$37\,001 - \$90\,000 | \$3572\text{ plus } 32.5c \text{ for each } \$1 \text{ over } \$37\,000 |
| \$90\,001 - \$180\,000 | \$20\,797\text{ plus } 37c \text{ for each } \$1 \text{ over } \$90\,000 |
| \$180\,001 \text{ and over } | \$54\,097\text{ plus } 45c \text{ for each } \$1 \text{ over } \$180\,000 |
The medicare levy is a health services tax that is calculated as a flat percentage of one's taxable income. In Australia, this tax is currently equal to 2\% of one's taxable income. \\ \text{Medicare levy}=\text{Taxable income} \times 2\%
GST is the goods and services tax paid on products like toys, electronics and furniture. GST in Australia is calculated as 10\% of the product's original price. GST does not apply to food.
Since GST is added to the original price, we can calculate the sale price of items including GST using the formula: \text{Sale price}=\text{Original price}\times 1.1
Examples
Example 2
Frank works as a chef. Because he wears a uniform for his job, he is able to claim the cost and cleaning of his uniform as an allowable tax deduction.
Frank’s work-specific uniform expenses are shown in the table below.
| Uniform item | Number of items | Price per item ($) |
|---|---|---|
| \text{Chef's checked trousers} | 2 | 20.50 |
| \text{Chef's jacket} | 1 | 25.00 |
| \text{Chef's hat} | 1 | 7.85 |
| \text{Apron} | 1 | 23.50 |
| \text{Protective shoes (pair)} | 1 | 70.00 |
For his uniform, Frank's total cleaning expenses for the year come to \$52. Calculate Frank’s total clothing and cleaning expenses for the year.
Frank also spent \$295 on a set of knives and \$15.75 on a knife pouch. He can claim these as a tools and equipment expense because he uses them only for work. Calculate his total tools and equipment expenses.
Calculate Frank's total allowable tax deductions.
Frank earns \$17.50 per hour and works 40 hours per week. Calculate his annual gross income if he works 46 weeks in a year.
Calculate Frank's taxable income.
Example 3
Last financial year, Roxanne earned \$154\,872.
Using the income tax rates shown in the table, evaluate the following.
| Taxable income | Tax on this income |
|---|---|
| 0 - \$18\,200 | \text{Nil} |
| \$18\,201 - \$37\,000 | 19\text{c}\text{ for each } \$1 \text{ over } \$18\,200 |
| \$37\,001 - \$87\,000 | \$3572\text{ plus } 32.5\text{c} \text{ for each } \$1 \text{ over } \$37\,000 |
| \$87\,001 - \$180\,000 | \$19\,822\text{ plus } 37\text{c} \text{ for each } \$1 \text{ over } \$87\,000 |
| \$180\,001 \text{ and over } | \$54\,232\text{ plus } 45\text{c} \text{ for each } \$1 \text{ over } \$180\,000 |
Calculate the income tax payable on Roxanne's income.
Calculate the Medicare levy payable, given that it is 2\% of taxable income.
Calculate the total amount Roxanne needs to pay in income tax and Medicare levy.
Example 4
The sales price of an item, including GST, is \$45. Find the price of the item without GST.
\text{Taxable income} = \text{Gross annual income} - \text{Tax deductions}
\text{Medicare levy}=\text{Taxable income} \times 2\%
Since GST is added to the original price, we can calculate the sale price of items including GST using the formula: \text{Sale price}=\text{Original price}\times 1.1
Income tax in Australia is currently calculated according to the table below:
| Taxable income | Tax on this income |
|---|---|
| 0 - \$18\,200 | \text{Nil} |
| \$18\,201 - \$37\,000 | 19\text{c}\text{ for each } \$1 \text{ over } \$18\,200 |
| \$37\,001 - \$90\,000 | \$3572\text{ plus } 32.5\text{c} \text{ for each } \$1 \text{ over } \$37\,000 |
| \$90\,001 - \$180\,000 | \$20\,797\text{ plus } 37\text{c} \text{ for each } \$1 \text{ over } \$90\,000 |
| \$180\,001 \text{ and over } | \$54\,097\text{ plus } 45\text{c} \text{ for each } \$1 \text{ over } \$180\,000 |