It is that time of year again when the year 12 students around Australia will be joining our workforce for the first time. School prepares you for many things which you will face in your lifetime, however, one thing that school fails to teach us is the importance of paying tax.
School leavers’ guide to tax
Many school leavers don’t understand why we need to pay tax, what the money is used for, what the different types of taxes are and what role the Australian Taxation Office (ATO) plays in our society. Luckily we are here to help you understand the process and the importance of the tax system within everyday life.
What is tax used for?
Essentially, tax is the money that the government collects to pay for services that they provide to the community. Education, hospitals, defence and roads are all services funded by the government which could not be provided if tax wasn’t paid by Australian workers and businesses. For example, your local government, who collects funding through property rates, is responsible for providing sewerage and garbage collection, parks, libraries and sporting fields. Whereas your state government is responsible for health care, education, transport and roads. Lastly, the federal government is in control of social security, welfare and family payments and immigration.
So as you can see, taxation can be a complex system, and if we didn’t pay tax, how would the government build new roads or maintain existing roads to keep us safe? How would they support those who are unemployed due to illness or a disability? How would we be able to further our education or that of younger generations and ensure that our country continues to prosper?
How is ‘income tax’ calculated?
Paying ‘income tax’ on the wage you earn from your job enables you to contribute to the services that you use every day. There are various tax rates dependent upon the total income you receive, per financial year (1 July to 30 June). For example, if your taxable income (your income less any claimable deductions) was $35,000, you would be required pay 19 cents for every dollar over the tax free threshold (which is currently set at $18,200).
So: $35,000 less $18,200 = $16,800
$16,800 x $0.19 = $3,192 tax paid for the year
In addition to paying income tax, all Australian residents have access to Medicare (our public health care system) which is partly funded by taxpayers by way of a Medicare Levy calculated at 2% of your taxable income. Using the above example, this would result in a further $700 payable to the tax office ($35,000 x 2%).
Generally, the required amount of tax to be paid is taken out of your weekly (fortnightly, or monthly) pay by your employer. So in the above example, if you earnt $35,000 per year ($673 each week), then $75 tax (including the medicare levy) would be taken out of your pay each week. Your employer would then pay this amount to the ATO, and at the end of the financial year (after 30th June each year), you would receive a PAYG summary, outlining the income you have received, and the amount of tax taken out of your pay and paid by your employer on your behalf. If you have earnt over the $18,200 and paid tax, you would then be required to complete a tax return. This can be done through myGov online or alternatively through a tax agent, such as Robertson Scannell who could assist you with what deductions you could claim and assist you with any queries you may have. The ATO would then check your PAYG summary for the income received and tax paid, allow for any deductions which reduce the amount of your income that is taxable, and advise if you owe any further tax or may be entitled to a refund.
If you have any queries in relation to any of the above, please contact our office (07) 4638 1155 and we will be more than happy to assist.