A step-by-step guide to calculating how much tax you should pay as an individual.
The amount of tax you should pay an individual will depend on a number of factors, such as your income, which defines what your marginal tax rate will be. Your residency is also taken into account, along with your eligibility for deductions and offsets. Read on for more information.
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Your tax is calculated based on your income (see the table above for tax rates) though the amount you pay can be altered by maximising your deductions and offsets. A deduction is any expense that is directly related to your work, but the Australian Tax Office (ATO) holds the final decision as to whether you can claim it. These are added together and deducted from your total income, leaving you with your taxable income. Which you are then taxed on. Tax offsets and your PAYG are considered as credits, which can reduce your payable net tax amount.
How to use the income tax calculator
The income tax calculator is simple to use. First, you’ll need to know your gross annual income. This is your income before any deductions or taxes (gross payments) and you can find this figure on your payment summary, group certificate or payslip. Once you enter this figure into the calculator, you’ll receive two results. You will see your net annual income, which is the income you receive after PAYG tax has been deducted, and how much tax you'll need to pay based on the income you've stated.
A deduction is an expense that is directly related to how you earn your income. In the tax sense these expenses are considered necessary for your earnings, and so the government allows you to deduct the money spent on them from your earned income, thus lowering your tax rate. Deductions are complicated and there are a host of rules around what you can and can’t deduct. We’ve got a whole section devoted just to them, if you want to know more then you should check it out. For more information on deductions, see this page.
These are benefits that directly reduce the amount of tax payable on your income. Generally, offsets can reduce the amount payable on your taxable income directly. They are often considered more valuable than deductions, because it applies to your basic tax payable, rather than your assessable income.
Pay-as-you-go (PAYG) income tax is tax that is paid incrementally as your earn, throughout the year. It’s designed to help you pay tax gradually, and avoid getting slapped with a hefty bill at the end of the financial year. The tax collects over the financial year is treated as credit in assessing tax payable after lodging your return. It was introduced in January 2000 and affects individuals, sole traders, companies, partnerships, trusts and superannuation funds, operating businesses, non-profit organisations and government bodies.
The following table shows the ATO’s tax rates for this tax year 2017-18 given that you’re an Australian resident.
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $87,000||$3,572 plus 32.5c for each $1 over $37,000|
|$87,001 – $180,000||$19,822 plus 37c for each $1 over $87,000|
|$180,001 and over||$54,232 plus 45c for each $1 over $180,000|
The above rates do not include the Medicare levy of 2%Back to top
The following table shows the ATO’s tax rates for this tax year 2017-18 given that you’re a foreign resident.
|Taxable Income||Marginal Tax Rate|
|$0 - $87,000||32.5c for each $1|
|$87,001 - $180,000||$28,275 plus 37c for each $1 over $87,000|
|$180,001 and over||$62,685 plus 45c for each $1 over $180,000|
The ATO are the branch of government responsible for administering tax legislation. It’s important to note that they don’t make any tax legislation. When you’re filing your return online it will go to them, they’ll process your return, they handle deductions and all matters relating to tax law. They’re a government agency, and so have the full weight of the law with them and can issue both public and private rulings. This includes judging on income flows and tax deductions in regards to specific tax legislation.
“The hardest thing in the world to understand is the income tax.” – Albert Einstein
If Einstein couldn’t even get to grips with it, then what good have the rest of us got? Fortunately, he was slightly exaggerating. Income tax is a charge imposed by governments on all financial income generated by all entities within their governing jurisdiction. This includes individuals, businesses, trusts and corporations, though this article will only cover individuals. Australia, like many countries, has a progressive income tax system, which means that the effective tax rates increase for high earners. This passes a greater tax burden to those who can afford it, and reduces the tax paid by those who make less money. It is also based on a self-assessment system, where the income tax year starts from 1 July to 30 June the next year. Tax returns are due on 31 October and is collected overtime through PAYG (see below). Income tax within Australia is based on taxable income received by individuals and entities.
- Australian residents and their worldwide income are liable for tax.
- Non-residents are liable for tax on their income from an Australian source.
A capital gains tax (CGT) is a tax incurred by a tax paying entity on the profits they have realised on an asset, through the sale of a capital asset for a price higher than the purchase price. So things like shares, property and bonds. It’s important to note that your main residence is generally exempt from capital gains tax. If you’ve sold assets for a profit then you may be liable to pay capital gains tax, however, remember that capital gains tax is only payable when a CGT event occurs (like when the asset is sold or transferred), so, for example, if you own a share that increases every year you don’t pay any tax on it until you dispose of it. Learn more about CGT.
Surprisingly, income tax is still a relatively new concept, with the first modern income tax being levied in 1799 in the United Kingdom. The income tax was introduced by William Pitt the Younger to pay for weapons and equipment to fight the French Revolutionary War. Here in Australia income taxes were introduced in the late 19th century, with the first widely believed to be in 1884 in South Australia. The rate was six pence of every pound, or around 2.5% (remember, pounds then were not divisible by 100). Since then income tax has spread to almost every country, and sadly rates have continued to climb, still on the bright side our quality of life has gone up too, and a big reason for that is that governments use our tax money to pay for things that make our life better. So if you’re in a tizz this tax season, and wondering why things have to be like this, just remember the last time you took a long, free walk in a beautiful public park, and remember that this is how you pay for it.Back to top
Put in it’s simplest terms, tax is how we pay for things that seem to be free. The three levels of government (federal, state and local) can take our tax, and spend it providing us with services. Things like parks, libraries, drainage gutters, kerbs, roads, electricity grid, the police force, and the military. A whole host of things that we can’t imagine paying for in person, is in fact paid for by our taxes. And while a lot of people complain about taxes, they really are the neat way of doing business in the modern world.