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How the ATO will calculate your income taxes

Written by

Shaun McGowan

This is how the ATO will calculate your income taxes

If there's one thing we can all agree on, it's that none of us like paying taxes. It's almost as if the harder you work, the less you earn.

It sure seems that way... but is it really? Here's the (not very straightforward) answer: Yes and no.

The truth is... When you make more money, you pay a higher rate of taxes. That means that at higher income levels, a larger percentage of your income goes towards tax. So you are, in fact, taking home a smaller percentage of the money you make.

But the way Australian tax brackets are set up, you will never take home less money in a higher tax bracket than you did in a lower one.

If that sounds confusing, don't worry. I’m going to show you a couple of examples to help clear things up.

But first, let's take a look at the current Australian tax brackets.

Australian tax brackets

The following chart will give you an overview of the Australian tax brackets and how they will affect your income.

Take a quick look to see where you fall. From here, you can estimate how much you will owe in taxes.

If you're like most Australians, taxes are taken out of your pay packet, so you don't have to worry about a big bill at the end of the tax year.

Still, it's good to know how much you’re paying.

Income bracketTax on income

0 to $18,200

Nil

$18,201 to $37,000

$0.19 per $1 over $18,200

$37,001 to $90,000

$3,572 + $0.325 per $1 over $37,000

$90,001 to $180,000

$20,797 + $0.37 per $1 over $90,000

$180,001+

$54,097 + $0.45 per $1 over $180,000

In addition to your income tax, you’ll also have to pay a Medicare levy of two per cent. As you can see, the tax rates get progressively higher as you earn more money.

But there is one silver lining... When your tax rate increases, you will only ever pay the increased rate on the portion of your income that exceeds the previous tax bracket. This is how you can progressively earn more as your tax bracket increases.

And if you happen to fall into lowest tax bracket, there's another reason to breathe a sigh of relief. This comes in the form of the Low Income Tax Offset (LITO).

Low Income Tax Offset

If you're eligible for the low income tax offset, you don't actually have to claim it in your tax returns. The ATO will automatically take the offset and apply it to your tax return. Here's what you need to know…

  • The LITO does not apply to any Medicare levy. You are still responsible for this two per cent unless your income is also below the Medicare levy threshold.
  • LITO is available to any Australian whose income does not exceed $66,667.
  • The largest offset of $445 is available to anyone whose income doesn’t exceed $37,000.
  • If your income falls between $37,001 and $66,667, LITO is reduced based on the amount your income exceeds $37,000. This means that you can earn up to $20,542 before you need to pay any income tax.

You can find out more about the low income tax offset on the ATO website.

But remember that if you are eligible, it will be applied automatically, so there isn't anything you have to do.

Here are some examples of the tax brackets in action. To keep it simple, I’ve ignored tax deductions and other factors that could impact the amount of tax you pay.

Low-income example

Your taxable income is $20,000. Here’s how to calculate taxes with the LITO:

  • $20,000 – free tax threshold of $18,200 = $1,800
  • $1,800 x 19 percent tax =$342
  • $342 against an available $445 offset = $0 taxes payable
  • Take home pay = $20,000

As you can see, if your income is especially low, the offset will not bring your tax total to below zero. This is a true offset and not a credit.

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Mid-income examples

Your taxable income is $50,000.

LITO calculation:

  • $50,000 - $37,000 = $13,000
  • $13,000 * 1.5% = $195
  • Tax calculation
  • $0 - $18,200 – no tax
  • $18, 2001 – $37,000 at 19c per dollar = $3,572
  • $37,001 – $50,000 at 32.5c per dollar = $4,225
  • Tax calculated by bracket = $7,797
  • Tax minus LITO: $7,797 - $195 = $7,602 - - total taxes due
  • Take home pay = $42,398

Your taxable income is $89,000. You are above the $66,667 income threshold so the LTIO does not apply.

Tax calculation

  • $0 - $18,200 – no tax
  • $18, 2001 – $37,000 at 19c per dollar = $3,572
  • $37,201 – $89,000 at 32.5c per dollar = $16,900
  • Total taxes due = $20,472
  • Take home pay = $68,528
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High income example

Your taxable income is $91,000 so a portion of your pay falls into the next tax bracket.

Tax calculation:

  • $0 - $18,200 – no tax
  • $18, 2001 – $37,000 at 19c per dollar = $3,572
  • $37,201 – $91,000 at 32.5c per dollar = $20,797
  • $90,000 – $91,000 at 37c per dollar = $370
  • Total taxes due = $21,167
  • Take home pay = $69,833

As you can see, you won’t actually lose money by moving into a higher tax bracket – but your pay will increase by less than you may expect, because you’ll pay more tax on that extra pay.

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Conclusion

Although things may seem complicated when you start calculating taxes (especially with the LITO deduction), it’s probably more straightforward than it seems. Remember that LITO is an automatic deduction, so you don’t have to worry about getting it wrong.

Still, we all like to see what we’re paying in taxes, so you may want to figure yours out in advance of tax time with our handy pay calculator.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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