How does the Australian Taxation Office turn a person's gross income into the tax they actually owe, and how does the PAYG system settle that bill across a financial year?
Calculate gross and net pay, identify allowable deductions and taxable income, compute the tax payable from a tax-bracket table, add the Medicare levy, and reconcile PAYG withheld against the tax assessed
The HSC Maths Standard 2 method for income tax. Gross vs net pay, allowable deductions and taxable income, tax payable from a marginal tax-bracket table, the 2% Medicare levy, and reconciling PAYG withheld against tax assessed for a refund or amount owing, with code-checked Australian worked examples and a tax-bracket diagram.
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What this dot point is asking
NESA wants you to follow a person's money through the tax system, from what they
earn to what they actually keep, and to settle the year's tax bill. There are four
linked skills. First, separate gross pay (everything earned) from net pay
(what lands in the bank after deductions). Second, find taxable income by
subtracting allowable deductions from gross income. Third, read a tax-bracket
table and compute the tax payable, then add the Medicare levy of .
Fourth, compare the tax assessed against the PAYG tax already withheld during
the year. That comparison decides whether the person gets a refund or has an
amount owing. Every one of these is arithmetic you already have. It is just
percentages and subtraction, organised by the rules the Australian Taxation Office
(ATO) uses.
This page is strictly Year 11 Money Matters. You will not be asked to memorise the
rates: an exam always gives you the tax table to read. What is examined is the
method, so that is what we drill, against a clearly labelled real table.
The answer
Work in a fixed order, because each step feeds the next.
- Gross income is the total earned from all sources: salary or wages, overtime,
commission, bonuses, plus things like bank interest and share dividends. - Allowable deductions are work-related costs the ATO lets you subtract, such as
union fees, a uniform, tools, self-education and work travel. They are not the
same as deductions from your pay slip (see the warning below). - Taxable income is what tax is calculated on:
- Tax payable comes from the bracket table. The table is marginal: each rate
applies only to the slice of income inside its own band. The table gives a fixed
base for each row that already totals the tax on all the lower bands, so you add
that base to the rate times the amount over the row's threshold. - The Medicare levy is a flat of taxable income, added on top of the tax.
- PAYG (Pay As You Go) is the tax your employer withholds from each pay and
sends to the ATO during the year. At tax time you compare it with the tax plus
levy actually assessed: if you paid too much you get a refund; if too little,
you have tax owing.
Gross pay, net pay and deductions
Gross pay is the full amount earned for a period before anything is taken out.
Net pay, or take-home pay, is what remains after the payroll deductions:
Typical payroll deductions are PAYG income tax, private health insurance and a union
fee. A worker on a gross weekly pay of $1650 who has $312 PAYG tax,
$43.20 health insurance and $11.50 union fees taken out keeps
, i.e. $1283.30 a week.
Superannuation is usually paid by the employer on top of your wage, so unless a
question lists it as a deduction from your pay, it does not reduce your net pay.
Taxable income and allowable deductions
Tax is never charged on your whole income. You first subtract the allowable
deductions to get the taxable income, and the tax is computed on that smaller
figure. Suppose a teacher earns a salary of $78600 and $240 of bank
interest, giving a gross income of , i.e. $78840.00. If her
allowable deductions are $540 union fees, $1180 self-education,
$8 per week laundry for a compulsory uniform (, i.e.
$416.00 a year) and $1320 car expenses, they total
, i.e. $3456.00. Her taxable income is therefore
, i.e. $75384.00. Notice how a recurring weekly expense
must be scaled to the full year before it is added in.
Reading the tax-bracket table (the marginal-band method)
The income tax rates are set by the government and change over time, so the exam
will always print the table you must use. The method below is identical whatever
the figures are. We will teach it against the Australian resident rates for the
2023-24 financial year:
| Taxable income | Tax payable |
|---|---|
| $0 to $18200 | Nil |
| $18201 to $45000 | 19c for each $1 over $18200 |
| $45001 to $120000 | $5092 + 32.5c for each $1 over $45000 |
| $120001 to $180000 | $29467 + 37c for each $1 over $120000 |
| $180001 and over | $51667 + 45c for each $1 over $180000 |
The table is marginal: the rate in each row applies only to the part of your
income that falls inside that row's band, not to your whole income. The first
$18200 (the tax-free threshold) is never taxed for anyone. Earning $1
more than $45000 does not retax your first $45000 at the higher rate; only
the extra dollar is taxed at .
The clever part of the table is the base figure at the start of each row (the
$5092, $29467, $51667). Each base is exactly the total tax owed on all
the income in the lower bands. It is worked out for you in advance, so you do not
have to add the bands by hand. You can check it. The tax on the first taxed band is
, which is precisely the
base printed for the next row. So to find tax payable you do two things. Take the
base for your row, then add the row's rate times the amount your income sits over
that row's threshold.
The bar below shows the rates as steps across the income bands, with a worked
taxable income of $72000 sitting in the band.
For the $72000 marked on the chart, the income is in the $45001 to
$120000 row. The amount over the threshold is , the
marginal part is , and adding the base gives
, i.e. $13867.00. Spread over the whole $72000 that is
an effective rate of about , far below the top marginal rate. The
average is dragged down by the tax-free threshold and the band. Your
marginal rate is the rate on your next dollar, here. Your effective
rate is total tax over total income, about here. The gap between these two
is the single most misunderstood idea in personal tax, and it is exactly what the
marginal table captures.
The Medicare levy
On top of the income tax, most taxpayers pay a Medicare levy that helps fund
the public health system. For Year 11 it is a flat of taxable income:
It is charged on the whole taxable income, not just the part above a threshold,
and it is added to the income tax, never blended into the bracket rates. On the
$72000 taxable income above, the levy is , i.e.
$1440.00, so the total tax due is , i.e. $15307.00.
PAYG: refund or amount owing
Employees do not pay their tax in one lump at the end of the year. Under PAYG
the employer withholds an estimate of the tax from each pay and forwards it to the
ATO. After 30 June you lodge a tax return; the ATO works out the actual tax plus
levy on your taxable income and compares it with the PAYG already paid:
If the PAYG withheld is more than the tax due, the difference is refunded to
you. If it is less, you have that amount owing. The comparison must be
against the total tax due (income tax plus the Medicare levy); comparing
only against the income tax is the most common error and usually turns a real "owing"
into a fake "refund". The chain from gross income all the way to take-home pay is
shown below, using a tradesperson with a gross income of $95400 and $4150 of
deductions.
The taxable income is , i.e. $91250.00. From the table
this lands in the $45001 to $120000 row, so the tax is
,
i.e. $20123.25. The levy is , i.e. $1825.00, so
the total owed to the ATO is , i.e. $21948.25, and
the after-tax income is , i.e. $69301.75.
How exam questions ask about this
Each wording maps to one of the steps above. Learn to translate them:
- "Calculate the taxable income." Add all income sources for gross income, then
subtract the allowable deductions. - "What are her total allowable deductions?" Add the listed work-related items
only, scaling any per-week or per-day figure to the year first. - "Calculate the tax payable / use the table above." Find the row the taxable
income sits in, take that row's base, and add the rate times the amount over the
row's threshold. Never apply the top rate to the whole income. - "Calculate the Medicare levy." Take of the taxable income.
- "Calculate the total tax (including the Medicare levy)." Add the tax payable
and the levy. - "Will she receive a refund or have tax owing? Justify your answer." Compute
the total tax due (tax + levy), compare with the PAYG withheld, and state refund
if PAYG is larger, owing if it is smaller, with the dollar difference. - "Calculate the net (take-home) pay." Subtract the listed payroll deductions
from the gross pay for the period. - "What percentage of her income is paid in tax?" Divide the total tax due by
the taxable income and multiply by ; this is the effective rate, below the
marginal rate.
Edge case: the tax-free threshold and "creeping" into a new band
Two facts trip students up. First, anyone with a taxable income of $18200 or
less pays no income tax at all, because the whole amount sits in the nil band;
a part-time worker on $16500 has zero tax payable (though they may still have
had PAYG withheld, which they would then get back as a refund). Second, moving just
past a threshold does not retax your earlier income. Compare a taxable income of
$45000 with $46000. At $45000 the tax is exactly the base, $5092.00.
At $46000 it is , i.e.
$5417.00. The extra $1000 of income cost only $325 in tax, taxed at the
marginal rate; the first $45000 is untouched. Earning more never leaves
you worse off after tax.
Exam-style practice questions
Practice questions written in the style of NESA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
2021 HSC-style3 marksUse the 2023-24 resident tax table on this page. Priya earns a gross income of $61800 and has allowable deductions of $1150 for the financial year. Calculate her taxable income, then calculate her tax payable (ignore the Medicare levy).Show worked answer →
Find the taxable income. Subtract the allowable deductions from the gross income:
, so the taxable income is $60650.00.
Choose the row in the table. $60650 lies between $45001 and $120000, so the rule is $5092 plus 32.5c for each $1 over $45000.
Find the amount over the threshold.
Apply the marginal rate to that slice. A rate of 32.5c per $1 is :
Add the base for the row. The $5092 is the tax already owed on the income up to $45000:
State the answer. Her taxable income is $60650.00 and her tax payable is $10178.25.
Markers reward the taxable-income line, the correct row, applying only to the $15650 over the threshold (not to the whole income), and adding the $5092 base. Charging on the full $60650 is the standard trap.
2023 HSC-style4 marksUse the 2023-24 resident tax table on this page. Tomas earns a salary of $43500 plus $300 in bank interest. His allowable deductions are $520 union fees and $6 per week for laundering a compulsory uniform. Calculate his taxable income, his tax payable and his Medicare levy, then state the total he must pay.Show worked answer →
Find the gross income. Add every source of income:
, so the gross income is $43800.00.
Total the allowable deductions. The laundry is weekly, so scale it to the year first () before adding the union fees:
Find the taxable income.
, so the taxable income is $42968.00.
Find the tax payable from the table. $42968 is between $18201 and $45000, so the rule is 19c for each $1 over $18200:
Find the Medicare levy. The levy is of the whole taxable income, not just the part over a threshold:
Add the tax and the levy.
State the answer. Tomas pays $4705.92 in income tax plus $859.36 Medicare levy, a total of $5565.28.
Markers reward annualising the $6 weekly laundry to $312, the taxable-income line, the correct first-taxed-band rule, and charging the levy on the full $42968 rather than only on the income above $18200.
2024 HSC-style5 marksUse the 2023-24 resident tax table on this page. Elena, a project manager, has a gross income of $138400 and allowable deductions of $3400. Her employer withheld $39000 in PAYG tax during the year. Calculate her taxable income, her tax payable, her Medicare levy and the total tax due, then state her refund or the amount she still owes.Show worked answer →
Find the taxable income. Subtract the allowable deductions from the gross income:
, so the taxable income is $135000.00.
Find the tax payable from the table. $135000 is between $120001 and $180000, so the rule is $29467 plus 37c for each $1 over $120000:
Find the Medicare levy. The levy is of the whole taxable income:
Find the total tax due. Add the income tax and the levy:
Compare with the PAYG withheld. She paid $39000, which is more than the $37717 assessed, so she receives a refund of the difference:
State the answer. Elena's taxable income is $135000.00, her tax payable is $35017.00, her Medicare levy is $2700.00 and the total tax due is $37717.00; because her PAYG of $39000.00 exceeded that total she receives a refund of $1283.00.
Markers reward using the $29467 base row (not the $5092 row), the levy on the full taxable income, and comparing PAYG against the tax plus levy. Comparing PAYG with the $35017 income tax alone would wrongly inflate the refund to $3983.
Practice questions
Original practice questions graded from foundation to exam level, each with a full worked solution. Try them before revealing the solution.
foundation2 marksIn a financial year Aisha earns a gross income of $64500 and has allowable tax deductions totalling $2380. Calculate her taxable income.Show worked solution →
Write the rule. Taxable income is the gross income from all sources minus the allowable deductions.
Substitute and subtract.
State the answer. Aisha's taxable income is $62120.00. The tax she pays will be worked out on this figure, not on the full $64500, which is exactly why claiming legitimate deductions lowers the tax bill.
foundation2 marksThe Medicare levy is of taxable income. Calculate the Medicare levy for a person whose taxable income is $58000.Show worked solution →
Write the rule. The Medicare levy is a flat of taxable income, so multiply the taxable income by .
Substitute and evaluate.
State the answer. The Medicare levy is $1160.00. This is charged on top of the income tax payable, not instead of it.
core3 marksUse the 2023-24 resident tax table on this page. A teacher has a taxable income of $102000. Calculate the tax payable (ignore the Medicare levy).Show worked solution →
Choose the correct row. A taxable income of $102000 is between $45001 and $120000, so the rule is $5092 plus 32.5c for each $1 over $45000.
Find the amount over the threshold.
Apply the marginal rate to that amount. A rate of 32.5c per $1 is :
Add the fixed base for the row. The $5092 already covers all the tax on the income below $45000:
State the answer. The tax payable is $23617.00. The base figure is the key idea: it is the total tax on every dollar up to $45000, so you only apply to the slice above $45000.
core4 marksUse the 2023-24 resident tax table on this page. Noah has a taxable income of $39000. Calculate his income tax payable and his Medicare levy, then state the total he must pay.Show worked solution →
Choose the correct row for the tax. A taxable income of $39000 is between $18201 and $45000, so the rule is 19c for each $1 over $18200.
Find the amount over the threshold.
Apply the marginal rate. A rate of 19c per $1 is :
So the income tax payable is $3952.00.
Find the Medicare levy. The levy is of the whole taxable income, not just the part over a threshold:
Add the tax and the levy for the total.
State the answer. Noah pays $3952.00 in income tax plus $780.00 Medicare levy, a total of $4732.00. The trap is charging the levy only on the income above $18200; the levy applies to the full taxable income.
exam5 marksUse the 2023-24 resident tax table on this page. Mia is a nurse. In the last financial year she earned a salary of $88200 plus $3600 in overtime. Her allowable deductions were $612 union fees, $180 for shoes and $940 in self-education. Her employer withheld $19500 in PAYG tax. Calculate her taxable income, her tax payable, her Medicare levy, and state her refund or the amount she still owes.Show worked solution →
Find the gross income. Add every source of income.
Find the total deductions and the taxable income.
So her taxable income is $90068.00.
Find the tax payable from the table. $90068 sits in the $45001 to $120000 row ($5092 + 32.5c per $1 over $45000):
Find the Medicare levy. of the taxable income:
Find the total liability for the year.
Compare with the PAYG already withheld. She paid $19500, which is less than the $21540.46 assessed, so she has tax owing:
State the answer. Mia's taxable income is $90068.00, her tax is $19739.10, her Medicare levy is $1801.36, and because her PAYG of $19500.00 fell short of the $21540.46 total liability she still owes $2040.46. Always compare PAYG with tax plus levy, not with the income tax alone.
exam5 marksUse the 2023-24 resident tax table on this page. Liam has a gross income of $195000 and allowable deductions of $7300. His employer withheld $55000 in PAYG instalments. Calculate his taxable income, his tax payable, his Medicare levy and the total tax due, then state his refund or amount owing and his overall (effective) tax-plus-levy rate to one decimal place.Show worked solution →
Find the taxable income.
Find the tax payable from the table. $187700 is above $180000, so the rule is $51667 + 45c per $1 over $180000:
Find the Medicare levy. of the taxable income:
Find the total tax due.
Compare with the PAYG withheld. He paid $55000, which is less than $58886, so he has tax owing:
Find the overall rate. Express the total tax plus levy as a percentage of taxable income:
State the answer. Liam's taxable income is $187700.00, his tax is $55132.00, his levy is $3754.00 and the total due is $58886.00; his PAYG of $55000.00 leaves $3886.00 owing, and his effective tax-plus-levy rate is about , well below the top marginal rate of because only the slice above $180000 is taxed at .
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