If you’re employed by someone else, your employer automatically deducts the necessary tax from your wage. Therefore, you should receive your net wage when you get paid. This system is known as Pay As You Go (PAYG) Withholding.
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 in the year (through the PAYG Withholding system) a refund will be due to you. We’ll show examples of calculating net tax payable later.