Anyone who earns an income over a certain amount, must pay income tax to the government. The government uses this money to provide services to the community, and infrastructure like roads, schools and hospitals.
Throughout any financial year ($1$1st July to $30$30th June), income tax, known as Pay As You Go (PAYG), is deducted in regular instalments from a worker's pay, and sent to the Australian Taxation Office (ATO). During the year, a worker may also have expenses that are considered 'tax deductible'. These allowable tax deductions may help to reduce the overall tax a worker has to pay.
Allowable tax deductions could include any of the following:
- Work-related expenses (see panel below)
- Donations to charities
- Tax agent fees
- Union fees
- Personal superannuation contributions
- Investment expenses
In most cases, receipts must be kept in order to claim expenses as tax deductions.
At the end of the financial year, an individual's total allowable tax deductions are subtracted from their gross income to obtain their taxable income.
$\text{Taxable income }=\text{gross income }-\text{allowable tax deductions }$Taxable income =gross income −allowable tax deductions
The most common allowable tax deductions are work-related expenses. The ATO provides detailed information about what constitutes a work-related expense. For example, travel expenses don't normally include everyday travel between home and work. Instead, an allowable travel expense might be the cost of attending a work-related conference, or to travel between workplaces.
These are expenses related directly to an individual's work, that they pay for themselves. They can include the following:
- Travel expenses
- Clothing, laundry and dry-cleaning expenses
- Home office expenses
- Self-education expenses
- Tool and equipment expenses
Worked example
Paul has a job in a retail store where he earned $\$45768$$45768 during the last financial year. He also did some weekend work as a DJ in a local club and received an additional $\$12250$$12250 during the same period.
Paul has the following allowable tax deductions:
- $\$510$$510 in union fees
- $\$240$$240 for the purchase of new DJ equipment
- $\$55$$55 in fees for his tax agent
Calculate his taxable income for the financial year.
Solution:
First, calculate Paul's gross income by adding his two incomes together.
| Gross income | $=$= | $45768+12250$45768+12250 |
| $=$= | $\$58018$$58018 |
Next, we add up all of Paul's allowable tax deductions.
| Allowable tax deductions | $=$= | $510+240+55$510+240+55 |
| $=$= | $\$805$$805 |
Finally, we calculate his taxable income.
| Taxable income | $=$= | $\text{gross income }-\text{allowable tax deductions }$gross income −allowable tax deductions |
| $=$= | $58018-805$58018−805 | |
| $=$= | $\$57213$$57213 |
Practice question
Emma's total allowable deductions for the year are $\$493$$493.
If her gross annual income is $\$25000$$25000, calculate her taxable income for the year.