You are liable to pay tax on your taxable income earned over an income year. For the majority of taxpayers, the income year runs from 1 July to 30 June. The process for determining the amount of income tax you are required to pay is outlined in ‘Process to determine how much tax you owe’ below.
Process to determine how much tax you owe
|ASSESSABLE INCOME (including net capital gains)|
Applicable marginal tax rate
TAX ON TAXABLE INCOME
Rebates and tax offsets
Medicare levy and surcharge
Higher education debt repayments
Tax paid during the year
REFUND OR AMOUNT OWING
Elements of the taxation process to determine how much tax you owe
The elements of the process can be described as:
- Assessable income is the income on which tax is assessed or levied. If you are an Australian resident for tax purposes, it includes income you have earned anywhere in the world. It includes ‘ordinary income’ (i.e. amounts that courts have determined to be income), and ‘statutory income’ (i.e. amounts that are specifically included in assessable income by the Acts). Common types of assessable income include salary and wages, termination payments from employment, dividends, interest and rent received, and net capital gains derived during the year.
- Allowable deductions are amounts spent to earn an assessable income – other than amounts that are capital, or private and domestic (e.g. clothing, child care and the cost of getting to and from work are private and domestic expenses, and cannot be deducted).
- Marginal tax rate is the tax rate that applies to your level of taxable income. The greater the amount you earn, the more tax you pay; not only because you have received more dollars, but because higher incomes attract higher tax rates. Changes to the marginal tax rates were introduced by the federal government in their 2020–2021 budget. A comparison between the marginal tax rates for the 2020–2021 financial year, and those to take effect from 1 July 2020 and from 1 July 2024 are shown in the table below.
- Rebates or tax offsets are direct reductions in the tax you must pay. These include rebates for dependents, the Family Tax Benefit, childcare tax offset, private health insurance rebate, low-income rebate, the tax offset for senior Australians, medical expenses rebate, and franking credits attached to dividends received.
- Higher education debts include the Higher Education Loan Program (HELP) and the Higher Education Contribution Scheme (HECS).
- Medicare levy is paid at a flat rate of 2 per cent of your entire taxable income unless you are a low-income earner. Also, a Medicare levy surcharge is applicable if your income exceeds a certain threshold and you do not have private health insurance. The surcharge is calculated at the rate of 1–1.5 per cent of your income.
- Tax paid during the year primarily consists of amounts paid under the Pay-As-You-Go (PAYG) system, including amounts withheld from your salary and wages by your employer, or (if you conduct your own business) tax instalments paid during the year. You will receive a refund if you have paid more tax during the year than is required. You have to pay more tax when your tax liability is greater than the tax instalments already forwarded to the ATO on your behalf.
COVID-19 and allowable deductions
As a result of the COVID-19 pandemic, many people have had to work from home. Individual taxpayers who work from home may be eligible to deduct working from home expenses. These expenses can be calculated using a fixed rate, or actual cost or shortcut method. For more information, see the ATO’s website.
A comparison of the marginal tax rates
|From 1 July 2020 to 30 June 2021||From 1 July 2024|
|Rate %||Income $||Rate %||Income $||Rate %||Income $|
|Third bracket||37||90001–180000||37||120001–180000||See above||See above|