How is your tax liability determined?

Contributed by AnnetteMorgan and current to 27 July 2018

You are liable to pay tax on your taxable income earned over an income year. For the vast majority of taxpayers, the income year runs from 1 July to 30 June.

For most taxpayers, the first step in determining your liability to tax is to total the assessable income you have earned over the income year. Assessable income is, as the name implies, the income on which taxation may be assessed or levied. From your total assessable income are deducted all your allowable deductions, which are usually the amounts you spent in earning your assessable income. The difference between these two figures is your taxable income. Your tax liability is then worked out by applying the relevant tax rate to your taxable income. The greater the amount you earn the more tax you pay, not only because you have received more dollars but because higher levels of income attract tax at higher rates.

The individual tax rates for 2017/18 are as follows
Taxable Income Tax Payable
$ $
0 - 18,200 Nil
18,201 - 37,000 Nil + 19% of excess over 18,200
37,001 - 90,000 3,572.00 + 32.5% of excess over 37,000
90.001 - 180,000 20,797 + 37% of excess over 90.000
180,001 + 54,097.00 + 45% of excess over 180,000
It may then be necessary to make other adjustments to your tax liability. For example, you may be entitled to a tax offset (or sometimes known as a rebate), which is a direct reduction in the tax you must pay. Your tax liability will be increased if you have a debt under the Higher Education Contribution Scheme (HECS-HELP). Unless you are a low-income earner, you will also have to pay the Medicare levy.

These areas and others will be considered in more detail in the following sections of this chapter.

Once any adjustments to the tax you have to pay are made, you will be able to determine whether you will have to pay further tax or receive a refund. The tax that you have to pay is reduced by any tax you have already paid during the course of the income year, for example, Pay-As-You-Go (PAYG) tax withheld by your employer. This means that you will receive a refund if you have paid more tax during the year than is required. You will have to pay further tax where your tax liability is greater than tax instalments already forwarded to the ATO on your behalf.

This process can be represented as follows:
Refund or Tax Payable
Assessable Income
less

Allowable Deductions
equals
Taxable Income
multiplied by Appropriate Tax Rate
equals
Tax on Taxable Income
less
Offsets/Rebates
equals
Tax Payable
plus
Medicare Levy and Surcharge
plus
HECS/HELP payments
less
Tax paid during the year
Equals

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