7. Income and Taxation

Lesson

The total income for an individual over a weekly, fortnightly or monthly pay period, is known as their gross pay. It could include any of the following forms of income:

- A wage or salary from employment
- Income support from a government allowance
- Bonuses
- Interest earned from financial institutions
- Income from a rental property

Net pay or 'take-home' pay is the amount an employee actually receives in their bank account at the end of each pay period. It is calculated by subtracting tax and other deductions from their gross pay.

$\text{Net pay }=\text{gross pay }-\text{tax }-\text{other deductions }$Net pay =gross pay −tax −other deductions

Each pay period, an employer must deduct tax instalments, known as Pay As You Go (PAYG), from their employee's pay, and send it to the Australian Taxation Office (ATO). The employee may also arrange for their employer to make additional deductions from their pay, such as:

- Voluntary superannuation contributions
- Union fees
- Insurance premiums
- Loan repayments
- Salary-Sacrifice payments

Individuals who are self-employed, or work as contractors, must pay their own tax in regular instalments to the the ATO.

Chris receives an annual salary of $\$78000$$78000 and is paid monthly. His employer deducts $22%$22% of his gross pay in tax. Chris has also arranged for his employer to make the following deductions:

- Personal superannuation contribution of $1.5%$1.5%
- Union fees of $\$48$$48

Calculate Chris's net monthly pay.

**Solution**:

First, we calculate Chris's gross monthly pay by dividing his salary by $12$12:

Monthly pay | $=$= | $\frac{78000}{12}$7800012 |

$=$= | $\$6500$$6500 |

Tax is calculated as $22%$22% of gross pay:

Tax | $=$= | $22%$22%$\text{of }$of $6500$6500 |

$=$= | $0.22\times6500$0.22×6500 | |

$=$= | $\$1430$$1430 |

Chris's 'other deductions' include union fees of $\$48$$48 and a superannuation amount that is $1.5%$1.5% of gross pay:

Other deductions | $=$= | $48$48 $+$+$1.5%$1.5% $\text{of }$of $6500$6500 |

$=$= | $48+\left(0.015\times6500\right)$48+(0.015×6500) | |

$=$= | $48+97.50$48+97.50 | |

$=$= | $\$145.50$$145.50 |

We can now calculate Chris's net monthly pay:

Net pay | $=$= | $\text{gross pay }-\text{tax }-\text{other deductions }$gross pay −tax −other deductions |

$=$= | $6500-1430-145.50$6500−1430−145.50 | |

$=$= | $\$4924.50$$4924.50 |

A note about superannuation

Superannuation is a way of saving for life after retirement from work. Contributions to superannuation can be made in two ways:

- In Australia, employers are required by law, to contribute $9.5%$9.5% of an employee's normal gross income towards a superannuation fund. It is paid on top of an employee's earnings, so it is like additional income rather than a deduction.

- Employees can also make voluntary contributions to their superannuation, and arrange for their employer to deduct these additional contributions from their pay.

Superannuation is money that can normally only be accessed after a person has reached retirement age.

Bill earns $\$843.50$$843.50 per week and has the following deductions from his gross wage: Tax $\$253.05$$253.05, superannuation $\$85$$85 and union fees $\$25.61$$25.61.

What is Bill’s net pay?

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.

A labourer is paid a gross annual salary of $\$31300$$31300. Each week he contributes $8$8% of his gross pay to a voluntary superannuation fund. His other weekly deductions are $\$103.50$$103.50 PAYG tax and $\$9.50$$9.50 for union fees.

Calculate the total weekly deductions.

Give your answer to the nearest cent.

Calculate the net weekly income.

Give your answer to the nearest cent.

models relevant financial situations using appropriate tools