Understanding Individual Tax Rates and Tax-Return
[Link to the AustralianTaxation Office - Australia]
Case Study 1: In the financial year 2018/2019, Lena - a single resident for the Australian tax purposes, worked as a casual teacher, and earned $42,000 wages. In her PAYG Payment Summary, the Total Tax Withheld is $16,000. She spent $350 on her work-related self-education. Medicare levy rate for 2018/2019 is 2%. What is the Tax rate applied to Lena's Taxable income? What is Lena's Tax Return?
ANSWER 1:
Step1: Calculate Lena's Taxable Income
TI = Assessable Income - Deductions
= $42,000 - $350
= $41,650
Step 2: Calculate Lena's Tax Obligation
Refer to Table 1, because Lena's Taxable Income is greater than $37,000, hence, the tax rate of 32.5% is applied, and Lena's Tax Obligation is calculated as follows.
Lena's Tax Obligation will be $3,572 plus 32.5c for each $1 over $37,000
Therefore:
Lena's Tax Obligation = $3,572 + 32.5% x ($41,650 - $37,000)
= $3,572 + 32.5% x $4,650
= $3,572 + $1,511
= $5,083
Step 3: Calculate Medicare levy
Medicare levy = Levy rate 2% of Taxable Income
= 2% x $41,650
= $833
Step 4: PAYG Total Tax Withheld provided in the Payment Summary
$16,000
Step 5: Tax Offset is not applicable
Step 6: Calculate Tax Return
If the Tax Return figure is 'Negative', then Lena would receive her Refundable back from her PAYG Total Tax Withheld.
If the Tax Return figure is 'Positive', then Lena would have to pay her liability to ATO.
Tax Return = Tax Obligation + Medicare levy - PAYG Total Tax Withheld
= $5,083 + $833 - $16,000
= - $10,084
This shows the negative figure. It means that Lena would receive her Refundable from the Tax Office. Therefore, the ATO would pay the Refundable of $10,084 to Lena's account.
Case Study 2: Zainab is an experienced teacher in a college and a single resident who is the subject for the Australian tax purposes. Zainab earns $115,000 in the 2018/2019 tax year, and the Medicare rate for the tax year is 2%. The Zainab's employer deducts $39,000 in her PAYG withhoding tax. Zainab has $2,500 in deductions and is entitled to a tax offset of $630. Outline the Tax Rate applying to Zainab's Taxable Income, and figure out her Tax Return.
ANSWER 2:
*
Note 1: In Australia, from 2017/2018 onwards - From 1 July 2017 for both men and women, the pension age is 65 years and 6 months. The pension age will rise by six months every two years, reaching 67 years by the first of July 2023 (Wolters Kluwer, 2019).
-Residents
-Under 18 years old
-Working holiday makers
-Self-education expenses
-Tax return instructions -Medicare levy
*CCH iKnow
CONTEXT: Financial year from 01/7/2018 to 30/6/2019
Key terms: Assessable income, Gross income[GI], Taxable income [TI], Net income[NI], Deductions, Medicare levy (current levy rate is 2% of Taxable Income=0.02 x TI), Tax Offsets or Offsets, Credits
Key Income Tax Equation: Taxable Income(TI) = Assessable income(AI) - Deductions
How Is My Tax-Return Calculated and Estimated?
In Australia for all workers, the income year [also known as the financial year] - for Individual Tax-Return, starts from the 1st of July of the previous year, to the 30th of June of the current year. Individuals can claim their Tax-Return during the time from July to end of October in the current year.
In general - at the end of each financial year, employers will provide their employees the statement of "PAYG payment summary - individual non-business" , or in a short it called the 'Payment Summary' [Note that the acronym of PAYG stands for Pay As You Go]. With this Payment Summary, individuals can claim their Tax-Return (if any) for that financial year.
In order to know how much of income tax would be refundable, the method of calculating Tax Return needs to be understood.
Tax-Return is also known as Refundable amount (the money you will receive from the TOTAL TAX WITHHELD showing in your Payment Summary) or Tax Payable/Liability(the money you have to pay back to ATO).
It is important to know key components of the income tax formula as below.
(***)Refundable or Income Tax Payable/Liability = Tax Obligations + Medicare Levy - Tax Offsets - Credits
In general, a procedure of calculation to work out the Refundable or Tax Payable includes six (6) key steps:
Step 1: Calculate and indicate your Taxable Income (TI)
Step 2: Use the relevant tax rate - in the Table 1, to calculate Income Tax [also known as Tax Obligations]
Step 3: Determine and calculate Medicare levy (if any and/or applicable)
Step 4: Determine and calculate your entitled Tax Offsets
Step 5: Determine and calculate your Credits
Step 6: Apply the formula (***) to calculate your Refundable OR Tax Payable/Liability
The above steps will be explained in detail as follows.
Step 1: Indicate and Calculate Your Taxable Income (TI)
The formula:
Taxable Income(TI) = Assessable income(AI) - Deductions
The following information provides examples of income and expense elements including in Assessable Income, and Deductions.
++Assessable Income
-Salary or wages
-Allowances, earnings, tips,..
-Employer lump sum payments
-Australian Government allowances and payments, such as Austudy or ABSTUDY, New Start allowance, pensions [see Note 1 for Pension age],...
-Australian annuities and superannuation income stream
-Australian superannuation lump sum payments - if any
-Attributed PSI (personal services income)
-Gross interest
-Dividends
Add up all elements of Assessable Income for the income year.
++Deductions
There are two (2) types: 1) a general deduction, and 2) a specific deduction.
First, a general deduction refers to any expenses/outgoing that is incurred for the purpose of producing/ gaining Assessable Income. Examples of the general deduction are listed as follows:
-work-related travel expenses
-work-related car expenses
-work-related laundry, clothing, and dry-cleaning expenses
-work-related self-education expenses
-work-related self education expenses
-other work-related expenses
Second, a specific deduction refers to an amount that is deductible under INCOME TAX ASSESSMENT ACT 1997 - SECT 8.5. Examples of the specific deduction include:
-donations or gifts
-dividend deductions
-interest fees deductions
-Fees of managing tax affairs
-Deductions showing on the supplementary section (of the tax return)
Add up all elements of Deductions for the income year.
Use the provided formula to figure out Taxable Income.
After determining the amount of Taxable Income, the next step will focus on calculating the Tax Obligations.
Step 2: Calculate Tax Obligations
Income tax is the tax that governments impose on income generated by individuals within their jurisdiction (Investopedia, 2019). Importantly, by law, taxpayers must file an income tax return annually to determine their tax obligations.
After having Taxable Income from Step 1, the next step is to apply the relevant tax rate in Table 1 to calculate Tax Obligations.
Put the amount of Tax Obligation aside, the Medicare levy figure needs to be considered.
Step 3: Calculate Medicare Levy
A Medicare levy is imposed on the Taxable Income. Currently, this levy is imposed at the rate of two percent of Taxable Income:
Medicare levy = Levy rate (2%) x Taxable Income (found in Step 1)
Note that the Medicare levy does NOT apply to low income taxpayers, families, seniors and pensioners. Refer to the ATO site to get information the Medicare levy low-income threshold of the 2018/2019 tax year.
In Step 4, the Tax Offsets will be considered.
Step 4: Calculate Your Entitled Tax Offsets (also known as Rebates)
++Tax Offsets / Rebates [the amount of money that reduce income tax payable in Step 2]
-Franking credits - dividends
-Spouse (without dependent child), child-housekeeper or housekeeper
-Senior Australians (age pensioners, service pensioners, and self-funded retirees)
-Pensioners
-Australian superannuation income stream
-Private health insurance
-Education tax refund
-Tax offsets showing on the supplementary section (of the tax return)
Step 5: Determine and Calculate Your Credits
++Credits
(These need to be allocated in the Tax Return for withholding tax.)
After completing all steps above, the last step is to find out the figure of Tax Return for the current financial year.
Step 6: Apply the Formula (***) to Calculate Your Refundable OR Tax Payable/Liability
When applying the formula to calculate Tax Return:
- if the result is 'Negative', it means that the amount of Tax you paid [by your employers] is greater than you Tax Obligations, then you would have your Refundable.
=====
In practice, the following Table 2 displays the technical steps to calculate Refundable or Income Tax Payable.
For understanding how to apply the above taxation information in order to calculate your own Tax Return, the activities below will show you the mentioned steps.
UNDERSTANDING ACTIVITIES
Find the Tax Return for the following cases.
Table 1
2018/2019 Individual
Tax Rate
|
Taxable Income
|
Notes [Tax Obligations]
|
Nil
|
$0 - $18,200
|
No Tax Obligations
|
19%
|
$18,201 - $37,000
|
19c for each $1 over $18,200, and upto
$37,000
|
32.5%
|
$37,001 - $90,000
|
$3,572 plus 32.5c for each $1 over $37,000,
and upto $90,000
|
37%
|
$90,001 - $180,000
|
20,797 plus 37c for each $1 over $90,000,
and upto $180,000
|
45%
|
$180,001 and over
|
$54,097 plus 45c for each $1 over $180,000
|
Key terms: Assessable income, Gross income[GI], Taxable income [TI], Net income[NI], Deductions, Medicare levy (current levy rate is 2% of Taxable Income=0.02 x TI), Tax Offsets or Offsets, Credits
Key Income Tax Equation: Taxable Income(TI) = Assessable income(AI) - Deductions
In Australia for all workers, the income year [also known as the financial year] - for Individual Tax-Return, starts from the 1st of July of the previous year, to the 30th of June of the current year. Individuals can claim their Tax-Return during the time from July to end of October in the current year.
In general - at the end of each financial year, employers will provide their employees the statement of "PAYG payment summary - individual non-business" , or in a short it called the 'Payment Summary' [Note that the acronym of PAYG stands for Pay As You Go]. With this Payment Summary, individuals can claim their Tax-Return (if any) for that financial year.
In order to know how much of income tax would be refundable, the method of calculating Tax Return needs to be understood.
Tax-Return is also known as Refundable amount (the money you will receive from the TOTAL TAX WITHHELD showing in your Payment Summary) or Tax Payable/Liability(the money you have to pay back to ATO).
It is important to know key components of the income tax formula as below.
(***)Refundable or Income Tax Payable/Liability = Tax Obligations + Medicare Levy - Tax Offsets - Credits
In general, a procedure of calculation to work out the Refundable or Tax Payable includes six (6) key steps:
Step 1: Calculate and indicate your Taxable Income (TI)
Step 2: Use the relevant tax rate - in the Table 1, to calculate Income Tax [also known as Tax Obligations]
Step 3: Determine and calculate Medicare levy (if any and/or applicable)
Step 4: Determine and calculate your entitled Tax Offsets
Step 5: Determine and calculate your Credits
Step 6: Apply the formula (***) to calculate your Refundable OR Tax Payable/Liability
The above steps will be explained in detail as follows.
Step 1: Indicate and Calculate Your Taxable Income (TI)
The formula:
Taxable Income(TI) = Assessable income(AI) - Deductions
The following information provides examples of income and expense elements including in Assessable Income, and Deductions.
++Assessable Income
-Salary or wages
-Allowances, earnings, tips,..
-Employer lump sum payments
-Australian Government allowances and payments, such as Austudy or ABSTUDY, New Start allowance, pensions [see Note 1 for Pension age],...
-Australian annuities and superannuation income stream
-Australian superannuation lump sum payments - if any
-Attributed PSI (personal services income)
-Gross interest
-Dividends
Add up all elements of Assessable Income for the income year.
++Deductions
There are two (2) types: 1) a general deduction, and 2) a specific deduction.
First, a general deduction refers to any expenses/outgoing that is incurred for the purpose of producing/ gaining Assessable Income. Examples of the general deduction are listed as follows:
-work-related travel expenses
-work-related car expenses
-work-related laundry, clothing, and dry-cleaning expenses
-work-related self-education expenses
-work-related self education expenses
-other work-related expenses
Second, a specific deduction refers to an amount that is deductible under INCOME TAX ASSESSMENT ACT 1997 - SECT 8.5. Examples of the specific deduction include:
-donations or gifts
-dividend deductions
-interest fees deductions
-Fees of managing tax affairs
-Deductions showing on the supplementary section (of the tax return)
Add up all elements of Deductions for the income year.
Use the provided formula to figure out Taxable Income.
After determining the amount of Taxable Income, the next step will focus on calculating the Tax Obligations.
Step 2: Calculate Tax Obligations
Income tax is the tax that governments impose on income generated by individuals within their jurisdiction (Investopedia, 2019). Importantly, by law, taxpayers must file an income tax return annually to determine their tax obligations.
After having Taxable Income from Step 1, the next step is to apply the relevant tax rate in Table 1 to calculate Tax Obligations.
Put the amount of Tax Obligation aside, the Medicare levy figure needs to be considered.
Step 3: Calculate Medicare Levy
A Medicare levy is imposed on the Taxable Income. Currently, this levy is imposed at the rate of two percent of Taxable Income:
Medicare levy = Levy rate (2%) x Taxable Income (found in Step 1)
Note that the Medicare levy does NOT apply to low income taxpayers, families, seniors and pensioners. Refer to the ATO site to get information the Medicare levy low-income threshold of the 2018/2019 tax year.
In Step 4, the Tax Offsets will be considered.
Step 4: Calculate Your Entitled Tax Offsets (also known as Rebates)
++Tax Offsets / Rebates [the amount of money that reduce income tax payable in Step 2]
-Franking credits - dividends
-Spouse (without dependent child), child-housekeeper or housekeeper
-Senior Australians (age pensioners, service pensioners, and self-funded retirees)
-Pensioners
-Australian superannuation income stream
-Private health insurance
-Education tax refund
-Tax offsets showing on the supplementary section (of the tax return)
Step 5: Determine and Calculate Your Credits
++Credits
(These need to be allocated in the Tax Return for withholding tax.)
After completing all steps above, the last step is to find out the figure of Tax Return for the current financial year.
Step 6: Apply the Formula (***) to Calculate Your Refundable OR Tax Payable/Liability
When applying the formula to calculate Tax Return:
- if the result is 'Negative', it means that the amount of Tax you paid [by your employers] is greater than you Tax Obligations, then you would have your Refundable.
=====
In practice, the following Table 2 displays the technical steps to calculate Refundable or Income Tax Payable.
Step
1
|
Taxable Income = Assessable Income -
Deductions
|
XXXX
|
|
Step
2
|
Tax Obligations
|
Tax Obligations: Use the rate in Table 1
|
XX
|
Step
3
|
Plus
|
Medicare levy rate (2%) x Taxable
Income
|
+ X
|
Step
4
|
Less
|
PAYG: TOTAL TAX WITHHELD (shown in
the Payment Summary)
|
- X
|
Step
5
|
Less
|
Tax Offsets
|
- X
|
Step
6
|
Tax Return
|
Refundable OR Income Tax Payable
|
= XX
|
For understanding how to apply the above taxation information in order to calculate your own Tax Return, the activities below will show you the mentioned steps.
UNDERSTANDING ACTIVITIES
Find the Tax Return for the following cases.
Case Study 1: In the financial year 2018/2019, Lena - a single resident for the Australian tax purposes, worked as a casual teacher, and earned $42,000 wages. In her PAYG Payment Summary, the Total Tax Withheld is $16,000. She spent $350 on her work-related self-education. Medicare levy rate for 2018/2019 is 2%. What is the Tax rate applied to Lena's Taxable income? What is Lena's Tax Return?
ANSWER 1:
Step1: Calculate Lena's Taxable Income
TI = Assessable Income - Deductions
= $42,000 - $350
= $41,650
Step 2: Calculate Lena's Tax Obligation
Refer to Table 1, because Lena's Taxable Income is greater than $37,000, hence, the tax rate of 32.5% is applied, and Lena's Tax Obligation is calculated as follows.
Lena's Tax Obligation will be $3,572 plus 32.5c for each $1 over $37,000
Therefore:
Lena's Tax Obligation = $3,572 + 32.5% x ($41,650 - $37,000)
= $3,572 + 32.5% x $4,650
= $3,572 + $1,511
= $5,083
(Note: Where does the figure of $3,572 come from?
Tax rate is 19% or 19c
for each $1 over $18,200, and up to $37,000. That is
19% x ($37,000 - $18,201)
= $3,572 [rounded])
Step 3: Calculate Medicare levy
Medicare levy = Levy rate 2% of Taxable Income
= 2% x $41,650
= $833
Step 4: PAYG Total Tax Withheld provided in the Payment Summary
$16,000
Step 5: Tax Offset is not applicable
Step 6: Calculate Tax Return
If the Tax Return figure is 'Negative', then Lena would receive her Refundable back from her PAYG Total Tax Withheld.
If the Tax Return figure is 'Positive', then Lena would have to pay her liability to ATO.
Tax Return = Tax Obligation + Medicare levy - PAYG Total Tax Withheld
= $5,083 + $833 - $16,000
= - $10,084
This shows the negative figure. It means that Lena would receive her Refundable from the Tax Office. Therefore, the ATO would pay the Refundable of $10,084 to Lena's account.
Case Study 2: Zainab is an experienced teacher in a college and a single resident who is the subject for the Australian tax purposes. Zainab earns $115,000 in the 2018/2019 tax year, and the Medicare rate for the tax year is 2%. The Zainab's employer deducts $39,000 in her PAYG withhoding tax. Zainab has $2,500 in deductions and is entitled to a tax offset of $630. Outline the Tax Rate applying to Zainab's Taxable Income, and figure out her Tax Return.
ANSWER 2:
Step
1
|
Taxable Income = Assessable Income –
Deductions
TI = $115,000 - $2,500
TI= $112,500
|
$112,500
|
|
Step
2
|
Tax Obligations
@tax rate = 37% |
Refer to Table 1, because Zainab's Taxable Income is
greater than $90,000, hence, the tax rate of 37% is
applied, and Zainab's Tax Obligation is calculated as follows.
Zainab's Tax Obligation will be 20,797
plus 37c for each $1 over $90,000, and upto $180,000
Therefore:
Zainab's Tax Obligation = $20,797 + 37% x ($112,500
- $90,000)
= $20,797
+ 37% x $22,500
= $20,797 + $8,325
= $29,122
(Note: Where does
the figure of $20,797 come from?
Because Zainab’s Taxable Income is
greater than $90,000, hence, there is two (2) layers of tax rates will be
applied:
1-Tax layer 1: Tax rate is 19% or 19c for each $1 over $18,200,
and up to $37,000. That is 19% x ($37,000 - $18,201) = $3,572 [rounded]
2-Tax layer 2: Tax Obligation is $3,572[from the tax layer 1] plus 32.5c for each $1
over $37,000, and up to $90,000. That is
$3,572 + 32.5% x ($90,000 – $37,001)
= $3,572 + 32.5% x $52,999
= $3,572 + $17,225
= $20,797 [This amount is rounded and embedded with the Tax layer 1])
|
$29,122
|
Step
3
|
Plus
|
Medicare levy = Levy rate 2% of Taxable
Income
= 2% x $112,500
= $2,250
|
+ $2,250
|
Step
4
|
Less
|
PAYG: TOTAL TAX WITHHELD (shown in
the Payment Summary)
= $39,000
|
- $39,000
|
Step
5
|
Less
|
Tax Offsets
= $630
|
- $630
|
Step
6
|
Tax Return
|
Tax Return = Tax Obligation + Medicare levy - Total Tax Withheld – Tax Offset
= $29,122 +
$2,250 - $39,000 - $630
= - $8,258
The figure of Tax Return is 'Negative', therefore, Zainab would
receive her Refundable from the Tax Office. It means that the ATO would pay the
Refundable amount of $8,258 to the Zainab's account.
|
= $8,258
Refundable
|
*
Note 1: In Australia, from 2017/2018 onwards - From 1 July 2017 for both men and women, the pension age is 65 years and 6 months. The pension age will rise by six months every two years, reaching 67 years by the first of July 2023 (Wolters Kluwer, 2019).
Useful and relevant links
-Residents-Under 18 years old
-Working holiday makers
-Self-education expenses
-Tax return instructions -Medicare levy
*CCH iKnow
Wolters Kluwer (2019). Australian Master Tax Guide, p354 - 64th Edition. Book Code 35732A.
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