Income tax is the tax on taxable income. Taxable income is total income less allowable deductions.
Here is an excerpt from a tax table
Taxable Income | Tax on taxable income |
$0-$18200 | Nil |
$18201-$37000 | 19c for each $1 over $18200 |
$37001-$80000 | $3572 plus 32c for each $1 over $37000 |
The second column has two parts, first, an initial amount of tax payable followed by a rate per dollar for each dollar earned over a specified threshold. The threshold is the last number in the second column.
Use the tax table above to calculate tax payable.
Example To find the tax payable if your total income is 45000 per annum and you have no deductions:
First, locate the row in the above table where 45000 occurs.
Second, find the initial tax payable. In this case this is 3572.
Third, find the excess income above the threshold \[ \text{Excess income = Taxable income - Threshold} \quad \] In this case this is \[ \begin{align} \text{Excess income} &= 45000 - 37000 \\ &= 8000 \end{align}\]
Now calculate the tax payable \[ \text{Tax payable} = \text{Initial tax payable} + \text{Excess income} \times \text{rate} \quad \] Plugging in the values gives \[ \begin{align} \text{Tax payable} &= 3572 + 8000 \times 0.32\\ &= 3572 + 2560 \\ &= 6132 \end{align}\]
Note - the 'formulas' above describe the process of the calculation. Don't try to remember the formulas, remember the process.
If there are deductions these need to be subtracted from total income first.
Example To find the tax payable if your total income is 46000 per annum and your deductions are 1300:
First, calculate taxable income by subtracting deductions from total income. \[ \text{Taxable income = Total income - Deductions} \quad \] which in this case is \[ \begin{align} \text{Taxable income} &= 46000 - 1300 \\ &= 44700 \end{align}\]
Second, locate the row in the above table where 44700 occurs.
Third, find the initial tax payable. In this case this is 3572.
Fourth, find the excess income above the threshold \[ \text{Excess income = Taxable income - Threshold} \quad \] In this case this is \[ \begin{align} \text{Excess income} &= 44700 - 37000 \\ &= 7700 \end{align}\]
Now calculate the tax payable \[ \text{Tax payable} = \text{Initial tax payable} + \text{Excess income} \times \text{rate} \quad \] Plugging in the values gives \[ \begin{align} \text{Tax payable} &= 3572 + 7700 \times 0.32 \\ &= 3572 + 2464.00 \\ &= 6036.00 \end{align}\]
Guided Examples
Income tax is paid by weekly or fortnightly or monthly instalments. The amount of tax paid always assumes your wages will be paid for a whole year. If you only work for part of a year you will be entiltled to a tax refund.
The refund amount is tax paid less tax payable.
For example, if taxable income was $36000 and tax paid was 4500:
From the tax table, excess income is \[ \begin{align} \text{Excess income} &= 36000 - 18200 \\ &= 17800 \end{align}\] so tax payable is \[ \begin{align} \text{Tax payable} &= 17800 \times 0.19 \\ &= 3382 \end{align}\] and the refund amount is \[ \begin{align} \text{Refund amount} &= 4500 - 3382 \\ &= 1118 \end{align}\]
You can reverse the process to find taxable income given tax payable.
Example To find the taxabl income if your tax paid is 8240 per annum and you have no deductions:
First, look in the second column of the table to locate the row where 8240 occurs. When the first number in the second column is greater than the tax paid the required row is the one above this.
Second, find the threshold income. In this case this is 37000.
Third, find the tax on excess income. Subtract the tax on threshold income from the total tax paid and rearrange \[ \begin{align} \text{Tax on excess income} &= 8240 - 3572 \\ &= 4668 \end{align}\] Next, find the excess income. \[ \begin{align} \text{Excess income} &= \frac{\text{Tax}}{\text{Rate}}\\ &= \frac{4668}{0.32} \\ &= 14587.45 \end{align}\] And the taxable income is the sum of the threshold income and the excess income \[ \begin{align} \text{Taxable income} &= 37000 + 14587.45 \\ &= 51587.45 \end{align}\]