Have you been confused by how the taxation system works in Australia? In this article, we are going to go through some of the tax basics including deductions.
How much tax am I paying?
While it is often believed that we pay a set amount of tax based on our earnings, this is not the case. In reality a taxpayer pays tax based on a stepped scale, so there is an average rate of tax that you pay rather than a set amount depending on your income.
There are different tax brackets and each bracket has an associated tax rate. The first of these brackets is tax-free. This means that income earned up to $18,200 does not attract any tax.
This table summarises the resident tax rates for the current (2020-21) financial year:
|Table: Resident tax rates 2020–21|
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $45,000||19 cents for each $1 over $18,200|
|$45,001 – $120,000||$5,092 plus 32.5 cents for each $1 over $45,000|
|$120,001 – $180,000||$29,467 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45 cents for each $1 over $180,000|
Please note, that in addition to these rates, a Medicare Levy of 2% is payable by each taxpayer as part of their income tax return.
You may think that once your taxable income exceeds $180,000, that you pay 45 cents of tax on every dollar you earn. However, this is not the case.
Example: Your taxable income for the 2021 financial year is $200,000, and the tax on your income is $60,667. That is made up of $51,667 as shown in the table above, plus 45% of the difference between $180,000 and $200,000 (45% x $20,000). The $60,667 tax payable is equals 30.33% of your taxable income. For a taxable income of $100,000, the tax payable is equals $22,967, which is 22.97% of your taxable income.
What does “I’ll get a tax deduction” mean?
Tax deductions are the number-one way to increase your tax refund, but how do tax deductions work?
Most work-related expenses may be claimed as tax deductions. Expenses such as income protection insurance, tax agent fees and charity donations are also accepted by the Australian Taxation Office (ATO). These expenses can be claimed at tax time and will reduce your taxable income.
However, just because you have spent money on a tax-deductible item, does not mean that you will receive the full amount back as a tax refund. The amount you will receive depends on your marginal tax rate.
Example: Your taxable income is $100,300 and you spend $300 on a stethoscope that you use 100% for work. The stethoscope is tax-deductible and will reduce your taxable income to $100,000. The tax saving due to the stethoscope purchase will be $97.5, which is 32.5% of the cost, based on your marginal tax rate. Therefore, it is best to think about the purchase and only spend money when needed and not purely for a tax deduction.
If you wish to further discuss potential tax advantages, please contact your local William Buck adviser.