While most employees will have Pay As You Go (PAYG) tax deducted from each pay packet, that probably won’t be the correct amount of tax that you will owe for your tax return. Why not? Because it is an estimation based on the assumption that whatever income you receive in that pay packet will be the amount you receive in each pay packet for the remainder of the year. So if your income varies – you receive a pay rise, or lose your job and therefore your income – then the estimation for the first portion of the year will be out of alignment. PAYG tax also doesn’t account for additional income, like share dividends, rental income and bank interest; nor does it factor in deductions (which pretty much everyone can claim to some extent). Things like the Medicare Levy should be included in PAYG calculations, but things like an outstanding HECS debt probably won’t be (unless you have notified your employer of the debt).
If you are using a registered tax agent to file your return, they should be able to give you a fairly good idea of what your return will be (not necessarily 100% accurate, as the ATO may take a different view to some things like whether or not a deduction is applicable).
If you are filing your own return, you should also end up with a tax payable amount; however, if you would like to have a rough idea of how much tax you can expect to pay in advance, the following will provide a rough summary of Australia’s individual income tax calculation process.
First of all, you aren’t taxed on all of your before-tax income, you are taxed on your Taxable Income. There are a number of exemptions depending on your individual circumstances, but in essence, your Taxable Income is your Assessable Income, minus any Allowable Deductions.
Once you know your taxable income, calculating your tax becomes reasonably straightforward. Australia has a progressive tax rate, which means the higher your Taxable Income, the higher percentage of that income you will pay in tax. However, something that often confuses people is that you only pay the higher rate on the income over each threshold. For example, if you earn less than $18,200, you are under the tax-free threshold and pay no tax. If you earn $20,000, you are in the 19% tax bracket, but you don’t pay 19% of the $20,000 ($3,800), you only pay 19% on $1,800 ($20,000 – $18,200, which is $342).
The ATO table below provides the rates for each tax bracket. The lump sum listed for incomes over $37,000 accounts for the maximum amount you would owe from all the lower tax brackets, while the number of cents per dollar allows you to calculate exactly what you owe for the bracket you are in. So if you earn $81,000, you would calculate 37% of $1,000 ($81,000 minus $80,000), which is $370, and add that to $17547, which is the tax you owe on all your income up to the $80,000 threshold.
The following rates for 2015–16 apply from 1 July 2015.
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $80,000||$3,572 plus 32.5c for each $1 over $37,000|
|$80,001 – $180,000||$17,547 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,547 plus 45c for each $1 over $180,000|
In addition, you will need to calculate your Medicare Levy, which is 2% of your entire taxable income. Depending on your income, you may also have to pay the Medicare Levy Surcharge (between 1-1.5%) and the Temporary Budget Repair Levy (currently 2% if you earn over $180,000).
Keep in mind that the ATO may not agree with your calculations or allow all of your deductions, but at least now you should be able to get a rough idea of the amount of tax you might owe.
By Jennifer Lowe