How is Your Income Tax Liability Determined?

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.

The elements of the process can be briefly described as follows:

ASSESSABLE INCOME (including net capital gains) – Allowable deductions
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TAXABLE INCOME x Applicable marginal tax rate
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TAX ON TAXABLE INCOME – Rebates and tax offsets
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TAX PAYABLE + Medicare levy and surcharge + Higher education debt repayments + Flood levy (2011/12 only) – Tax paid during the year
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REFUND OR AMOUNT OWING

Assessable income is, as the name implies, the income on which tax may be assessed or levied. If you are an Australian resident for tax purposes, it will include income you have earned anywhere in the world. It will include “ordinary income”, being amounts which courts have determined to be income, and “statutory income”, being amounts that are specifically included in assessable income by the Acts. Some common types of assessable income include salary and wages, termination payments from your employment, dividends, interest and rent received, and net capital gains derived during the year.

Allowable deductions are usually amounts you spent to earn your assessable income other than amounts which are capital or private and domestic in nature. (For instance, clothing, child care and costs of getting to and from work are private and domestic expenses, and cannot be deducted.)

Marginal tax rate is the tax rate that applies to your level of 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.

Rebates or tax offsets are direct reductions in the tax you must pay. It includes dependants rebates, the Family Tax Benefit, childcare tax offset, private health insurance rebate, low income rebate, senior Australians tax offset, medical expenses rebate, and franking credits attached to dividends received.
Higher education debts includes the Higher Education Loan Program (HELP) or its predecessors such as the Higher Education Contribution Scheme (HECS).

Medicare levy is paid at a flat rate on your entire taxable income unless you are a low-income earner. There is also a Medicare levy surcharge applicable if your income exceeds a certain threshold and you do not have private health insurance.

Flood levy is a levy imposed on middle and higher income earning individuals for the 2011/12 tax year only. If you have less than $50,000 taxable income you will not be liable to pay the levy. Additionally, the levy is not imposed on certain individuals who were affected by a natural disaster between 1 July 2010 and 30 June 2011.

Tax paid during the year will primarily consist of amounts paid under the Pay-As-You-Go (PAYG) system, including amounts withheld from your salary and wages payments by your employer or instalments of tax you are required to pay during the year if you conduct your own business. 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 ATOon your behalf.

More information on each of these topics can be found in TaxPack or at the ATO’s website.