How much tax you pay depends on how much income you earn net of deductible expenses. Simply speaking, tax is paid to the Australian Taxation Office (ATO) based on your taxable income. When we prepare your tax return, our focus is to report the correct taxable income.
The basic formula for calculating your taxable income is: total income minus total deductions. Income can come from a range of sources, such as: wages, business earnings, interest earned, dividends received, Centrelink payments etc. We will work out all your allowable deductions, whether they relate to your work, your business or your investments. We do this to reduce your taxable income, hence reduce the amount of tax the ATO will ask from you.
Once your taxable income has been established, the ATO have set rates on how much tax is due on that particular amount of taxable income. This figure can also depend on your personal circumstances. A few examples include; the types of income earned, whether you are single or member of a family, whether you have a HELP debt or your age at year end. We then compare the tax figure calculated by the ATO at year end to any tax that you have already paid during the year.
The most common form of prepaid tax comes from an employer withholding tax from their employees. If you are a wage earner, each time you get paid, your employer is withholding some tax and paying it to the ATO on your behalf. If you have sources of income that are generally untaxed during the year (for example business profits, interest earned or investment earnings etc.), the ATO can also ask you to prepay some tax during the year. These are known as PAYG instalments and are usually due on a quarterly basis.
Once we complete your tax return (to include all income, deductions and tax paid) we can then let you know if you have paid too much, or not enough. If your prepaid tax is greater than what the ATO are asking for, you will receive a tax refund. If your prepaid tax is less than what the ATO are asking for, you will have to pay further tax.
Author: Allan Edmunds
Email: allan@faj.com.au
