NSW Mathematics Standard 11 - 2020 Edition
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7.08 Calculating income tax and medicare levy
Lesson

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.

PAYG tax

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. 

 

Worked example

EXAMPLE 1

The PAYG tax amount, $y$y, that an employer must withhold each week, is given by the formula

$y=ax-b$y=axb

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:

  1. Calculate the amount of PAYG tax his employer will need to withhold from his wage each week.
  2. Calculate Jeremy's net pay, if there are no other deductions.

Solution

  1. Before we use the table, we notice that the number of whole dollars in Jeremy's weekly income is $959$959. Adding $99$99 cents gives $x=\$959.99$x=$959.99. This amount is greater than $\$711$$711, but less than $\$1282$$1282, so from the fifth row of the table, we use the values $a=0.3477$a=0.3477 and $b=165.4423$b=165.4423, and substitute them into the formula:
    $y$y $=$= $ax-b$axb    
      $=$= $0.3477\times959.99-165.4423$0.3477×959.99165.4423   (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$$168   (Rounded to the nearest dollar)
    Tax withholding amounts are always rounded to the nearest dollar, so Jeremy's employer would deduct $\$168$$168 in income tax from his gross weekly pay.
     
  2. To calculate Jeremy's net pay we subtract his income tax and any other deductions from his gross pay. In this case, there are no other deductions.
    Net pay $=$= $\text{gross pay }-\text{tax }-\text{other deductions }$gross pay tax other deductions
      $=$= $959.50-168$959.50168
      $=$= $\$791.50$$791.50
    So $\$791.50$$791.50 is the amount Jeremy would receive each week from his employer. It is his 'take-home' pay. 

 

The ATO provides the following alternatives to using the formula: 

  • A PAYG online calculator
  • A set of PAYG tax tables

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).

 

What is the tax-free threshold?

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.

 

Submitting a tax return

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.

 

Total tax payable

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:

Table 1: Resident tax rates (2018-19)
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.

  • If PAYG tax is less than the total tax payable, the individual will owe tax money to the ATO. This is sometimes called a tax debt.
  • If PAYG tax is more than the total tax payable, the individual will be entitled to a tax refund.

 

Net income

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

 

Worked example

example 2

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.

  1. Determine Jacqueline's taxable income.
  2. Use table 1 above to calculate her income tax payable.
  3. If the Medicare levy is $2%$2% of taxable income, calculate how much Medicare levy she pays.
  4. Calculate her total tax payable.
  5. If Jacqueline has already paid $\$15184$$15184 in Pay As You Go (PAYG) tax throughout the year, determine how much she either owes in tax or is entitled to as a tax refund.
  6. Determine her net income for the year.

Solution

  1. Jacqueline's gross income includes her salary and her income from the rental property.
    Taxable income $=$= $\text{gross income }-\text{allowable tax deductions }$gross income allowable tax deductions
      $=$= $\left(68592+16640\right)-5420$(68592+16640)5420
      $=$= $85232-5420$852325420
      $=$= $\$79812$$79812
  2. Jacqueline's taxable income falls within the $3$3rd row of the table, so her income tax is calculated as follows:
    Income tax $=$= $3572+0.325\left(79812-37000\right)$3572+0.325(7981237000)
      $=$= $3572+0.325\times42812$3572+0.325×42812
      $=$= $3572+13913.90$3572+13913.90
      $=$= $\$17485.90$$17485.90
  3. The Medicare levy is $2%$2% of taxable income.
    Medicare levy $=$= $2%$2% of $\$79812$$79812
      $=$= $0.02\times79812$0.02×79812
      $=$= $\$1596.24$$1596.24
  4. Jacqueline's total tax payable is equal to the sum of her income tax and the Medicare levy.
    Total tax payable $=$= $\text{income tax }+\text{Medicare levy }$income tax +Medicare levy
      $=$= $17485.90+1596.24$17485.90+1596.24
      $=$= $\$19082.14$$19082.14
  5. Jacqueline has already paid $\$15184$$15184 in PAYG tax throughout the year. Because her total tax payable is more than her PAYG amount, she will owe tax to the ATO.
    Tax owed $=$= $19082.14-15184$19082.1415184
      $=$= $\$3898.14$$3898.14
  6. To determine her net income, we subtract her total tax payable form her taxable income.
    Net income $=$= $\text{taxable income }-\text{total tax payable }$taxable income total tax payable
      $=$= $79812-19082.14$7981219082.14
      $=$= $\$60729.86$$60729.86

 

Practice questions

Question 1

The Medicare levy is charged at $2%$2% of taxable income. Calculate the Medicare levy on a taxable income of $\$60000$$60000.


 

Question 2

In the last financial year, Carl was paid a wage every month, and each week there was $\$61$$61 deducted as PAYG tax.

  1. How much did Carl pay in total in PAYG tax last financial year?

  2. 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.

    A

    He will still have tax owing.

    B

    He will receive a refund.

    A

    He will still have tax owing.

    B

 

Question 3

Last financial year, Roxanne's taxable income was $\$157$$157$872$872.

Using the income tax rates shown in the table, evaluate the following.

Resident tax rates (2018-19)
Taxable income Tax on this income
$0-\$18200$0$18200 Nil
$\$18201-\$37000$$18201$37000 $19c$19c for each $\$1$$1 over $\$18200$$18200
$\$37001-\$90000$$37001$90000 $\$3572$$3572 plus $32.5c$32.5c for each $\$1$$1 over $\$37000$$37000
$\$90001-\$180000$$90001$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
  1. Calculate the income tax payable on Roxanne's income.

  2. Calculate the Medicare levy payable, given that it is $2%$2% of taxable income.

    Give your answer to the nearest cent.

  3. Calculate the total amount Roxanne needs to pay in income tax and Medicare levy.

Outcomes

MS11-5

models relevant financial situations using appropriate tools

MS11-6

makes predictions about everyday situations based on simple mathematical models

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