Calculating Tax (HSC SSCE Mathematics Standard): Revision Notes
Calculating Tax
Understanding tax returns
When you earn money in Australia, you need to pay income tax. Each year, you must submit a tax return to the Australian Taxation Office (ATO). This document reports your total income earned and the tax you have already paid during the financial year, which runs from 1 July to 30 June.
The ATO provides information to help people complete their tax returns, including details about current income tax rates. These rates can change from year to year based on government policy and inflation, so it is important to check the current rates when preparing your tax return.
Tax rates are updated regularly by the Australian government. Always check the ATO website for the most current tax rates and brackets when preparing your tax return, as the rates shown in examples may not reflect the current year's rates.
How Australia's progressive tax system works
Australia uses a progressive tax system, which means that the tax rate increases as your income increases. People who earn more money pay a higher percentage of their income in tax. This system includes a tax-free threshold of $18,200, meaning if you earn this amount or less, you do not pay any income tax at all.
The tax rates increase in steps, called tax brackets. Each bracket has a different tax rate that applies to the portion of income within that range. Understanding how these brackets work is essential for calculating how much tax you need to pay.
In a progressive tax system, you don't pay the same rate on all your income. Instead, different portions of your income are taxed at different rates. For example, even if you earn $50,000, the first $18,200 is tax-free, and only the amount above each threshold is taxed at the higher rate for that bracket.
Personal income tax rates
The following table shows the tax brackets and rates. Note that these are example rates from 2017-18 and may not reflect current rates. Always check the ATO website for the most up-to-date information.
Important: The tax rates shown below are examples from the 2017-18 financial year and are used for learning purposes only. Current tax rates and brackets may be different. Always verify the current rates on the official ATO website before making any tax calculations or decisions.
| Taxable income | Tax payable |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $37,000 | Nil + 19 cents for each $1 over $18,200 |
| $37,001 – $87,000 | $3,572 + 32.5 cents for each $1 over $37,000 |
| $87,001 – $180,000 | $19,822 + 37 cents for each $1 over $87,000 |
| $180,001 and over | $54,232 + 45 cents for each $1 over $180,000 |
Let me explain how to read this table. If your taxable income is between $18,201 and $37,000, you pay no tax on the first $18,200, then you pay 19 cents for every dollar you earn above $18,200. For higher income brackets, you start with a base amount of tax (like $3,572 for the third bracket) and then add an additional amount based on how much you earn above the threshold for that bracket.
The highest tax rate is 45 cents per dollar for income over $180,000. This means very high earners pay a larger share of their income in tax compared to lower earners.
Pay As You Go (PAYG) tax
Most employed people have PAYG tax deducted automatically from their wages or salary throughout the year. Your employer calculates an estimate of your annual tax and takes this amount from each pay period. This makes it easier to pay tax gradually rather than in one large payment at the end of the financial year.
However, the PAYG tax deducted might not exactly match the actual tax you owe based on your total annual income. This is where tax refunds and tax owing come into play.
PAYG tax is an estimate based on your regular income. If your income changes during the year, or if you have additional income sources or tax deductions, the PAYG amount may not perfectly match your final tax liability. This is why you need to lodge a tax return to calculate the exact amount you owe.
Tax refund vs tax owing
After you lodge your tax return, the ATO calculates your actual tax payable based on your total taxable income for the year. They then compare this to the tax you have already paid through PAYG deductions.
| Tax refund | Tax owing |
|---|---|
| Tax refund = Tax paid – Tax payable | Tax owing = Tax payable – Tax paid |
Tax refund: If you have paid more tax throughout the year than you actually owe, the ATO will refund you the difference. This happens when your PAYG deductions were higher than your actual tax liability.
Tax owing: If you have paid less tax than you should have, you will need to pay the difference to the ATO. This occurs when your PAYG deductions were too low or if you had additional income that was not taxed at the source.
Understanding the difference:
- Tax refund occurs when: Tax paid > Tax payable (you get money back)
- Tax owing occurs when: Tax payable > Tax paid (you must pay the difference)
The key is comparing what you've already paid (through PAYG) with what you actually owe (calculated from your total annual income).
Calculating tax payable: worked examples
Let me show you how to calculate tax payable using the tax brackets table.
Example 1: Tax payable for $25,000 income
Worked Example: Calculating Tax and Refund for $25,000 Income
Question: Manjula has a taxable income of $25,000. How much tax will she have to pay? If Manjula has paid $1,650 in PAYG tax, what will be her refund?
Solution:
Step 1: Look at the tax rates table to find which bracket $25,000 falls into.
$25,000 is between $18,201 and $37,000 (the second bracket).
Step 2: Identify the tax formula for this bracket.
For this bracket, the tax formula is: Nil + 19 cents for each $1 over $18,200.
Step 3: Calculate the amount over $18,200.
Manjula needs to pay $1,292 in tax.
Step 4: Calculate the tax refund by subtracting the tax payable from the tax paid.
Manjula's refund will be $358.
Example 2: Tax payable for $200,000 income
Worked Example: Tax Calculations for $200,000 Income
Question: Joel has a taxable income of $200,000 and has paid $65,300 in tax instalments.
a) Calculate the amount of tax payable by Joel.
b) Will Joel receive a refund or will he have to pay more tax?
c) What percentage of his income is paid as tax?
Solution:
Part a: Calculate tax payable
Step 1: Look at the tax rates table to find which bracket $200,000 falls into.
$200,000 is in the highest bracket ($180,001 and over).
Step 2: Apply the tax formula for this bracket.
For this bracket, the tax formula is: $54,232 + 45 cents for each $1 over $180,000.
Step 3: Calculate the tax.
Joel is required to pay $63,232 in tax.
Part b: Determine refund or tax owing
Step 1: Calculate the difference between tax paid and tax payable.
The ATO owes Joel $2,068, so he will receive a refund.
Part c: Calculate percentage of income paid as tax
Step 1: Express the tax paid as a fraction of taxable income.
Step 2: Convert to percentage by multiplying by 100.
Joel pays approximately 31.6% of his income as tax.
Medicare levy
The Medicare levy is an additional charge on top of income tax. It helps fund Australia's universal healthcare system, ensuring all Australians have access to free or low-cost medical and hospital care.
The Medicare levy is calculated as 2% of your taxable income. This applies to most Australian residents, though some low-income earners may be exempt or pay a reduced rate.
Some low-income earners, certain foreign residents, and people with specific exemptions may not need to pay the Medicare levy or may pay a reduced rate. The ATO provides detailed information about Medicare levy exemptions and reductions on their website.
Formula:
Example: Calculating Medicare levy
Worked Example: Calculating Medicare Levy
Question: The Medicare levy is 2% of taxable income. What is the Medicare levy if the taxable income is $90,600?
Solution:
Step 1: Write the Medicare levy as 2% of the taxable income.
Step 2: Express 2% as a decimal (0.02).
Step 3: Calculate.
The Medicare levy payable is $1,812.
Exam tips
Key Strategies for Tax Calculation Problems:
When solving tax calculation problems:
- Always identify which tax bracket the income falls into before calculating
- Remember that "over" means "more than" – you only pay the higher rate on the amount exceeding the threshold
- Check whether the question asks for tax payable, tax refund, or tax owing – these are different calculations
- For Medicare levy, simply multiply the taxable income by 0.02 (which is 2%)
- Show all working steps clearly in exam answers
- Round percentages to the specified number of decimal places
Remember!
Key Points to Remember:
- A tax return must be lodged with the ATO each financial year (1 July to 30 June) to report income and tax paid
- Australia uses a progressive tax system where tax rates increase as income increases
- The tax-free threshold is $18,200 – no tax is paid on income below this amount
- PAYG tax is deducted from wages throughout the year, but may not exactly match the final tax liability
- If you pay too much tax during the year, you receive a tax refund; if you pay too little, you have tax owing
- Medicare levy is an additional 2% charge on taxable income to support Australia's healthcare system