How much income tax a person pays is based on how much they earn. The more someone earns, the more tax they pay. For Australian residents, income tax is only paid on annual incomes greater than $\$18200$$18200, an amount known as the tax-free threshold.
Income earners also pay an additional tax called the Medicare levy, which helps fund Australia's public health care system.
Each pay period, whether weekly, fortnightly or monthly, an employer will deduct tax from their employees gross pay, and send it to the Australian Taxation Office (ATO). This is known as Pay As You Go (PAYG). Deducting or withholding tax in this way means that income earners are not faced with a single large tax bill at the end of the financial year.
The correct amount of tax to withhold will depend on the employee's income. In the following example, we'll look at how the ATO and employers calculate these amounts.
The PAYG tax amount, $y$y, that an employer must withhold each week, is given by the formula
$y=ax-b$y=ax−b
where | $x$x is the number of whole dollars of gross weekly income, plus $99$99 cents |
$a$a and $b$b are values obtained from the table below: |
Weekly earnings ($x$x) less than | $a$a | $b$b |
---|---|---|
$\$355$$355 | - | - |
$\$422$$422 | $0.19$0.19 | $67.4635$67.4635 |
$\$528$$528 | $0.29$0.29 | $109.7327$109.7327 |
$\$711$$711 | $0.21$0.21 | $67.4635$67.4635 |
$\$1282$$1282 | $0.3477$0.3477 | $165.4423$165.4423 |
$\$1730$$1730 | $0.345$0.345 | $161.9808$161.9808 |
$\$3461$$3461 | $0.39$0.39 | $239.8654$239.8654 |
$\$3461$$3461 & over | $0.47$0.47 | $516.7885$516.7885 |
Note: this table is based on tax withheld with the tax-free threshold (see panel below).
If Jeremy's gross weekly earnings are $\$959.50$$959.50:
Solution
$y$y | $=$= | $ax-b$ax−b | ||
$=$= | $0.3477\times959.99-165.4423$0.3477×959.99−165.4423 | (Substitute $a=0.3477$a=0.3477, $x=959.99$x=959.99 and $b=165.4423$b=165.4423) | ||
$=$= | $168.346$168.346... | |||
$=$= | $\$168$$168 | (Rounded to the nearest dollar) |
Net pay | $=$= | $\text{gross pay }-\text{tax }-\text{other deductions }$gross pay −tax −other deductions |
$=$= | $959.50-168$959.50−168 | |
$=$= | $\$791.50$$791.50 |
The ATO provides the following alternatives to using the formula:
Both tools are based on the formula and will produce the same results. Regardless of the method used, the employer will need to know if the employee is claiming the tax-free threshold (see panel below).
When a person starts a new job, the employer will ask them to fill in a form called a tax declaration, which provides the ATO with details of their employment.
One question on the form that often causes confusion is whether to claim the tax-free threshold. In most cases the answer will be 'yes', because it means paying a lower rate of tax.
If a person answers 'no' to this question, it is usually because the job they are about to begin is a second job (the tax-free threshold can only be claimed once). Generally, if a person has more than one job, they would claim the tax-free threshold on the job with the highest income.
Every year, after June 30th, income earners are required to submit a form known as a tax return to the ATO.
The purpose of the tax return is to determine whether an individual has paid the correct amount of tax for the financial year. It accounts for all sources of income, PAYG tax already paid, allowable tax deductions and other financial information.
Determining the correct amount of tax, involves working out the total tax payable (see below), and comparing it with the PAYG tax that has already been withheld.
The total tax payable by most individuals will be made up of income tax and the Medicare levy, both of which are based on their taxable income for the financial year.
The Medicare levy is an additional tax that is paid to help fund Medicare, Australia's public health care system. It is calculated as follows:
$\text{Medicare levy }$Medicare levy $=$= $2%$2% $\text{of taxable income }$of taxable income
The correct amount of income tax for Australian residents is determined from the following table:
Taxable income | Tax on this income |
---|---|
$0$0 — $\$18200$$18200 | Nil |
$\$18201$$18201 — $\$37000$$37000 | $19c$19c for each $\$1$$1 over $\$18200$$18200 |
$\$37001$$37001 — $\$90000$$90000 | $\$3572$$3572 plus $32.5c$32.5c for each $\$1$$1 over $\$37000$$37000 |
$\$90001$$90001 — $\$180000$$180000 | $\$20797$$20797 plus $37c$37c for each $\$1$$1 over $\$90000$$90000 |
$\$180001$$180001 and over | $\$54097$$54097 plus $45c$45c for each $\$1$$1 over $\$180000$$180000 |
Here is the tax table in interactive form:
The total tax payable is found by adding together the income tax and the Medicare levy.
$\text{Total tax payable }=\text{income tax }+\text{Medicare levy }$Total tax payable =income tax +Medicare levy
We now compare the total tax payable with the PAYG tax that has already been paid, to see if the individual owes tax or is entitled to a tax refund.
To find an individual's net income for the year, we would subtract their total tax payable (income tax $+$+ Medicare levy) from their taxable income.
$\text{Net income }=\text{taxable income }-\text{total tax payable }$Net income =taxable income −total tax payable
Jacqueline is completing her tax return. She has a gross salary of $\$68592$$68592 and income from a rental property of $\$16640$$16640. She is claiming $\$5420$$5420 in allowable tax deductions.
Solution
Taxable income | $=$= | $\text{gross income }-\text{allowable tax deductions }$gross income −allowable tax deductions |
$=$= | $\left(68592+16640\right)-5420$(68592+16640)−5420 | |
$=$= | $85232-5420$85232−5420 | |
$=$= | $\$79812$$79812 |
Income tax | $=$= | $3572+0.325\left(79812-37000\right)$3572+0.325(79812−37000) |
$=$= | $3572+0.325\times42812$3572+0.325×42812 | |
$=$= | $3572+13913.90$3572+13913.90 | |
$=$= | $\$17485.90$$17485.90 |
Medicare levy | $=$= | $2%$2% of $\$79812$$79812 |
$=$= | $0.02\times79812$0.02×79812 | |
$=$= | $\$1596.24$$1596.24 |
Total tax payable | $=$= | $\text{income tax }+\text{Medicare levy }$income tax +Medicare levy |
$=$= | $17485.90+1596.24$17485.90+1596.24 | |
$=$= | $\$19082.14$$19082.14 |
Tax owed | $=$= | $19082.14-15184$19082.14−15184 |
$=$= | $\$3898.14$$3898.14 |
Net income | $=$= | $\text{taxable income }-\text{total tax payable }$taxable income −total tax payable |
$=$= | $79812-19082.14$79812−19082.14 | |
$=$= | $\$60729.86$$60729.86 |
The Medicare levy is charged at $2%$2% of taxable income. Calculate the Medicare levy on a taxable income of $\$60000$$60000.
In the last financial year, Carl was paid a wage every month, and each week there was $\$61$$61 deducted as PAYG tax.
How much did Carl pay in total in PAYG tax last financial year?
At the end of the financial year, he calculates his total tax payable to be $\$3049$$3049.
Which of the following is true?
He will receive a refund.
He will still have tax owing.
Last financial year, Roxanne's taxable income was $\$123$$123$872$872.
Using the income tax rates shown in the table, evaluate the following.
Taxable income | Tax on this income |
---|---|
$0-\$18200$0−$18200 | Nil |
$\$18201-\$45000$$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 income tax payable on Roxanne's income.
Calculate the Medicare levy payable, given that it is $2%$2% of taxable income.
Give your answer to the nearest cent.
Calculate the total amount Roxanne needs to pay in income tax and Medicare levy.