How to Calculate Tax
Now, although none of us actually looks forward to calculating our taxes and lodging a return each year, as the saying goes – it’s one of the two things in life that are certain! However, the more you know about the process of calculating your taxes, the less mystifying – and intimidating – they’ll be.
Consequently, you’ll be less likely to put off submitting your return when tax season rolls around and feel less stressed about the whole process overall. So, in an effort to both educate you and give you greater peace of mind, this post explores the subject of how to calculate tax.
How Is Tax Calculated In Australia?
First, let’s gain more insight into how tax is calculated in Australia, as well as how to lodge your tax return.
What Is Income Tax?
Income tax is the tax applied to an individual’s annual income for the financial year, which runs from 1st July to 30th June. You’re required to pay tax on all your forms of income, which consists of three main categories.
- Personal earnings
- Salary from employment
- Super pensions
- Government pension and other payments and allowances
- Annuities (insurance payments)
- Business earnings: profits from business and returns from investments
- Capital gains: profits when assets, such as property or shares, are sold
- Personal earnings
Fortunately, however, you’re not required to pay income tax on all your income – only on what’s known as your taxable income. Your taxable income will be what’s known as your assessable income minus tax deductions, which we’ll look at a little later in this post.
Conversely, income that’s not considered assessable can be classified as non-assessable or exempt forms of income. Examples of exempt or non-assessable income include:
- Certain government payments (e.g. disability support, child care subsidies, carer allowance)
- Child support and spouse maintenance payments
- Some scholarships, bursaries, grants and awards
- Rewards or gifts on special occasions, such as cash birthday presents and gifts from family
- Prizes won in lotto draws (or on game shows)
It’s also important to note that if you’re an Australian for tax purposes, you must declare income earned elsewhere, including employment income, investment income from foreign assets, and capital gains on foreign income. If, on the other hand, you’re a foreign resident working in Australia, you only have to declare any income that you earned in Australia.
Income Tax Rates
When you know (or have an idea) of your taxable income, you can determine your income tax rate. This is the percentage of your income that you’re required to pay as Australia has a progressive tax system, so the higher your income, the more tax you’re obliged to pay.
Here’s a breakdown of the tax rates for those who are Australian residents for tax purposes. Please note, however, that these rates don’t include the Medicare levy:
The good news, as you can see from the table above, is that you’re not required to pay income tax on the first $18,200 you earn in a financial year; this is known as the tax-free threshold. After that, the tax rates kick in, with the lowest rate being 19% and the highest rate being 45%, which is levied against incomes over $180,000.
You’ll also notice that you’re required to pay a fixed amount on the last three tax brackets (from $45001 and up), as well as a percentage of anything you earned over a particular threshold.
However, if you’re a foreign resident, you’ll be taxed at different rates than those who are registered as Australians for tax purposes. Here’s a list of tax rates for foreign residents:
As both of the above tables show, the differences between the fixed amounts you’re required to pay as you climb tax brackets are pretty steep. Because of this, we can’t recommend enough that you keep all of your expense receipts so you can maximise your tax deductions – and not wind up in the wrong tax bracket. We’ll look into this in greater detail in the next section.
What Are Tax Deductions?
Tax deductions are expenses related to your work that you have incurred during the financial year. These expenses are referred to as deductions as they are deducted from your assessable income. The amount that’s left after these deductions is your taxable income – which determines your tax rate.
Here’s a quick rundown of some of the expenses that could qualify as tax reductions:
- Vehicle And Travel
- Clothing and Laundry
- Home Office
- Self-Education and Professional Training Courses
- Gifts and Donations
However, as emphasised earlier in this post, it’s vital that you keep your receipts as proof of your expenses. Without them, you’ll only be able to claim $300 worth of expenses – which could potentially put you in the wrong tax bracket and result in a higher tax rate applied to your income. To put it another way, not keeping your receipts could cost you thousands.
To learn more about tax deductions, including a more detailed list of expenses you can claim against your assessable income, check out our previous post on the Top 10 Expenses to Claim on Your Tax Return. Better still, if you want to talk over your personal circumstances and get a better idea of how much you can claim as tax deductions, give us a call or drop us a line.
How To Lodge Your Tax Return
Now, when it comes to lodging, or submitting, your tax return, the earliest you’re able to do this is 1st July – as this signifies the beginning of the new financial year. Conversely, the deadline for lodging your tax return is 31st October.
There are three options for lodging your tax return:
- Lodge your own tax return online with myTax – the ATO’s online service.
- Lodge a paper tax return
- Lodge your tax return with a registered tax agent, such as an accountant
To make the process of lodging your taxes as smooth as possible, gather all your important documents together, including all proof of income and expense receipts. Also, it’s important to check that all your details are up to date. For instance, if you’ve moved home or recently changed your name, you should update these details with the ATO. Even tiny mistakes like these can delay the processing of your tax return for weeks or, worse, result in fines.
What Happens If I Don’t Lodge A Tax Return On Time?
If you don’t’ lodge your tax return by the due date, the ATO will hit you with a fine known as a Failure to Lodge (FTL) penalty. You will be fined a penalty unit, which currently stands at $222, every 28 days – with a maximum of 5 penalty units, which comes to a total of $1110.
However, these penalties also increase for those with higher assessable incomes. If you have an assessable income between $1 million and $20 million, you’re known as a medium entity and the penalty is multiplied by 2 – so you’ll be fined $444 every 28 days. Similarly, if you have an assessable income over $20 million, the penalty is multiplied by 5 – so you’d be forking out $1110 every 28 days.
How Do You Calculate Taxes Manually?
If you choose to lodge your tax return yourself, knowing how to manually calculate your taxes is essential. That being said, it’s still invaluable knowledge if you decide to have an accountant lodge your taxes for you. With that in mind, let’s look at the steps involved in calculating your taxes manually.
What Are The Steps for Calculating Taxes Manually?
- Step 1: Calculate Your Total Assessable Income
As discussed at the start of this post, your assessable income is the portion of your income that you’re eligible to be taxed on. It’s the total of your Australian-sourced income and your foreign-sourced income.
- Step 2: Calculate Your Tax Deductions
These are all your work-related expenses which you can claim against your assessable income.
- Step 3: Calculate Your Taxable Income
Taxable Income = Total Assessable Income – Tax Deductions
- Step 4: Calculate Tax on Taxable Income
Once aware of your taxable income, you’ll know what tax bracket you fall into and what your tax rate is. Apply this tax rate to your taxable income to work out your Tax on Taxable Income.
For example, let’s say your taxable income works out to be $100,000. Then your tax rate would be 5,092 + 32.5% of excess over 45,000.
- = 5,092 + (32.5/100 x (100,000 – 45,000))
- = 5,092 + (0.325 x 55,000) = 5,092 + 17,875
- = $22,967
- Step 5: Apply Tax Offsets to Calculate Net Tax Payable
Tax offsets, also referred to as tax rebates, are additional deductions that are applied to your tax on taxable income, depending on various personal circumstances.
Common tax offsets include:
- Private health insurance rebate and offset
- Low and middle-income tax offset (LMITO).
- Seniors and pensioners tax offset (SAPTO)
- Zones and overseas forces offset
- Foreign income tax offset
- Super income stream tax offset
- With tax offsets applied, you then have your Net Tax Payable
- Step 6: Add Medicare Levy to Calculate Total Tax Payable
Finally, add the Medical Levy to calculate your Total Tax Payable. There are two components to the Medicare Levy on your taxes:
- Medicare Levy: 2% of your taxable income
- Medicare Levy Surcharge (MLS): You’re required to pay this if you don’t have adequate private patient hospital cover and earn above a certain income ($90,000 for singles and $180,000 for families).
You’ve now successfully calculated how much income tax you’re required to pay.
After reading this post, we hope you have a better idea of how to calculate your tax and the different steps involved. Being aware of how to calculate your taxes – even if it’s only a rough one – will make your life that much easier when tax season rolls around. Better still, the more you know about calculating your taxes, the lower your tax bill will end up being. So it literally pays to understand how to calculate your taxes.
Fortunately, if you’re confused in any way, or simply want more clarification on things like which of your income is assessable, which tax offsets you qualify for, and how to maximise your tax deductions, get in touch and we’d be happy to help.