If you’re classified as an employee, your employer automatically deducts the necessary income tax from your wage. Therefore, you should receive your net wage (after-tax income)when you get paid. This system is known as Pay As You Go (PAYG) Withholding. The employer submits the tax collected from its various employees directly to the ATO.
Once taxable income is determined, the next step to calculate your tax is to apply the relevant tax rate to your taxable income. We’ll explore this in more depth later.
Finally, tax payable is adjusted by additional levies/offsets and rebates you’re entitled to claim. This forms your net tax payable.
To determine the net tax payable on your taxable income, use this formula:
1. Assessable income – allowable deductions = Taxable income
2. Taxable income x relevant marginal tax rate = Tax payable on taxable income
3. Tax payable – non-refundable tax offsets = Net tax payable on taxable income
4. Net tax payable + HELP debt repayments + Medicare levy and Medicare levy surcharge – tax credits and refundable tax offsets = Refund or amount owing
At the end of the financial year when your income tax return is lodged, if too much tax has been deducted during the year (through the PAYG Withholding system) a refund will be due to you and conversely, if insufficient tax has been deducted throughout the year, you will pay the difference owing to the Tax Office. We’ll show examples of calculating net tax payable later.