The Basics of Personal Income Tax

personal tax basicsAll residents of Australia who earn wages or profits from investments must pay taxes. Typically, taxes are taken out of your regular pay every time you are paid by your employer. At the end of the financial year on 30 June, each person with earnings is required to file a tax return.This tax return must be submitted no later than 31 October, or you risk facing penalties.

What is Included in Taxable Income?
The first step to understanding your taxes is to learn what is included in your taxable income. Your taxable income includes all of your payments received from your employment, pensions, annuities, investments, capital gains, many governmental payments, foreign income, and trust payments. The total of all of these payments equates to your taxable income. This amount is used to determine how much tax you owe to the government.

Medicare Levy
A Medicare levy of 1.5 per cent is collected on all of your taxable income. Your employer will automatically deduct this amount from your pay and submit it to the Australian Taxation Office. This money is used to fund the Australian public health system, which allows you to seek medical attention from your doctor and all public hospitals for no fee.

Some low-income earners are exempt from paying the Medicare levy. Foreign residents are also not required to pay this levy, but also do not qualify for free health services. Some people with high-incomes may be required to pay an additional Medicare levy surcharge if they do not have adequate private insurance cover. This extra surcharge can range from 1 to 1.5 per cent depending on the person’s income level.

Income Tax
Your employer will also take income tax out of your pay each time you are paid. The amount they deduct will depend on your specific pay level. At the end of the year, you will receive a payment summary from your employer that will report how much money you earned during the year and how much tax was paid to the Australian Taxation Office (ATO).

The Australian income tax system is based on a sliding scale structure. There is no tax charged on the first $18,200 earned each year. This means that if you earn less than $18,200 during the year, you will not owe any taxes for the year. There is a $0.19 charge for every dollar earned from $18,201 to $37,000 and a $0.325 charge for every dollar earned from $37,001 to $80,000, a $0.37 charge for every dollar earned from $80,001 to $180,000, and a $0.45 charge for every dollar earned over $180,001.

For example if John earned a total of $200,000, his taxes owed would be:

First $18,200                           $0.00
$18,201 to $37,000                 $3,572.00
$37,001 to $80,000                 $13,975.00
$80,001 to $180,000               $37,000.00
$180,001 and up                    $9,000.00
Total tax due:                         $63,547.00

*note that these threshold numbers are as of the 2014 financial year
Reduction of Taxes
There are several things that help offset how much you owe in taxes. There are three basic ways to decrease the overall amount you owe in taxes, including tax deductions, tax credits, and salary sacrificing. Below is some basic information about each type of tax benefit.

  • Tax Deductions. Tax deduction are deducted directly from your taxable income to reduce the overall amount of tax you owe for the year. There are several tax deductions that you may be eligible for, such as expenses related to work, education expenses, accounting fees to complete taxes, and donations to nonprofit organizations.
  •  Tax Credits. Tax credits, on the other hand, are deducted after your taxes have been calculated and directly decrease the amount of taxes you owe for the year. There are numerous types of tax credits, including taxpayers with a dependent relative, low-income earners, seniors and pensioners, medical expenses over a set amount, and a portion of a superannuation income.
  • Salary Sacrificing. Salary sacrificing, also referred to as salary packaging, allows you to place some of your income towards various benefits, such as payments made to your superannuation fund, childcare payments, or health insurance payments. This plan must be set up through your employer and is paid by your pre-tax income.

It is recommended to seek help from a tax accountant when filing your taxes. This can ensure that you get all of the tax benefits and credits that you deserve at the end of the year and can help significantly lower the amount of taxes you owe. A tax accountant can also help you plan for your future, to make sure you owe less tax in the upcoming years.

Image courtesy of Robert Cochrane /

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