How does my tax get calculated?

May 11, 2019

Ever wondered how your individual income tax gets calculated? Or how the Australian taxation system works? Long story short, in Australia the more you earn the more you get taxed.

Tax affects all of us, so it’s important to understand how it works. If we didn’t pay tax, how would we run our schools? Our hospitals? Who would build our roads?

Our tax in Australia works on a sliding scale. Essentially, the higher your income, the more tax you pay. In this blog we will be running how to calculate tax as an individual wage earner or sole trader.

Taxable income

You are probably familiar with the term ‘taxable income’, but just need a refresh on what this means.

Taxable income is the total of your assessable income less allowable deductions.

It’s assessable income less allowable deductions.

Taxable income is the amount your tax gets calculated on.

Assessable income includes salary and wages, bank interest received and investment income, just to give you an idea.

Tax free threshold

You can earn up to $18,200 in a financial year and not pay any tax. This is called the tax free threshold.

The $18,200 tax free threshold is equivalent to

$350 per week

$700 per fortnight

$1,517 per month

As soon as you earn over the tax free threshold you start paying tax.

Individual tax rates

Your taxable income will determine which tax bracket you fall in and how much tax you pay. Most of us will fall in the middle bracket earning between $37,001 to $90,000.

Medicare Levy

The Medicare levy is an additional tax, which is not included in the individual income tax rates. Medicare gives us access to health care. The current Medicare rate is 2% of your taxable income.

If your income reaches a certain threshold and you don’t have appropriate level of private health insurance, you may have to pay the Medicare levy surcharge. The additional surcharge ranges from 1% to 1.5% of your taxable income. I won’t go into detail on the Medicare levy, but it’s important to remember you maybe be subject to the surcharge if your taxable income is greater than $90,000 as a single person or over $180,000 as a couple or family.

Tax withheld

If you are an employee, your employer will be withholding tax from your gross wage to account for you tax payable at the end of the financial year. If you are self employed, it will be up to you to withhold and pay your own tax.

If you have two or more jobs or other taxable income sources, you may be caught in an unintentional tax trap as a result of the tax free threshold. You may need to check you are not claiming the tax free threshold twice or end up with a tax bill at the end of the year!

Tax calculation example 

Let’s run through an example on how to calculate tax on your taxable income. We have Stella. She’s an employee admin assistant.

It’s important to note that your total tax payable will increased or reduced due to:

  • Tax offsets (if applicable)
  • PAYG withheld (tax paid throughout the year by your employer)
  • PAYG instalments (tax paid throughout the year directly by yourself)
  • HELP debt
  • Other withholding tax offsets
  • If you are a resident for tax purposes for only part of the year (not full year)

I hope this blog was helpful. Remember, tax legislation is changing all the time, so please double check the current tax rates before making any calculations.

If you have specific questions about your own tax, contact your trusted tax agent (aka accountant) to get the right advice.

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Nothing makes me happier than implementing time-saving tools and systems that help small businesses get ahead. Instead of being a cog in a large corporation, freelance consulting lets me be the adaptive Bookkeeper on the Sunshine Coast you need. Whatever your financial situation, I’ll help you find new approaches to cut unnecessary costs and alleviate undue pressure. If you’re ready to watch your business grow, let’s start a conversation