Australian Income Tax for Beginners (from July 2024)

Intro There was heated debate and multiple revisions to the stage three tax cut. Now that the dust has settled and the final version is law, it is time to turn the page. In this video I'm going to explain the new Australian income tax rate for financial year 2025. How you can easily calculate your tax. Practical ways to minimize tax legally. And how to lodge a simple tax return. Let's dive in. Tax Brackets There are three main components in your Australian tax obligation. Income tax. Medicare levy. Other taxes and levies which may or may not apply to you. First things first, Australia has what's called a progressive tax system. Income is divided into segments known as tax brackets. Each bracket corresponds to a specific tax rate. As you move up through the income brackets, the tax rate increases. This means that the more you earn, the higher as a percentage of your income that goes to taxes. Picture your income as a multi-layered cake. For each layer, the ATO slices off a different portion. The bottom layer. The first 18,200, is not taxed at all. You get to keep the whole thing As we move up to the next layer – the portion of your income that is between $18,201 and $45,000 The ATO takes away 16% of it. As for the third layer of your cake, the portion above $45,000 until $135,000, the ATO takes away a bigger slice which is 30%. And we move up to the fourth layer of your cake, the portion of your income above $135,000 until $190,000, the ATO takes away an even bigger slice which is 37%. Finally, the top layer of your cake, anything above $190,000, the ATO takes away almost half which is 45%. The higher the layer of the cake, the larger the slice that goes to the ATO. Remember the higher tax rate only applies to income in a specific layer of the cake or a specific tax bracket. For example, our friend John increase his income from 135,000 to 145,000 and moved from the third tax bracket to the fourth bracket. Only the income that falls into the fourth bracket, which is 10,000, is taxed at the higher rate, not his entire income This brings us to the concept of marginal tax rate. essentially this is a rate at which any extra dollar you earn is taxed. It's typically higher than your average tax rate, which is calculated by dividing your total tax by your total taxable income. The tax rates in FY 2025 represent a reduction from the previous financial year. As you can see there are both reductions in tax rates and lifts of the tax brackets, meaning most Australian will pay less tax in FY2025 than FY2024. Medicare Levy in addition to income tax, Australians also pay Medicare levy, which helps fund the public health system. This levy is currently 2% of your taxable income. in our previous example, on top of the income tax, John will pay 2900 in Medicare levy. Other taxes and levies - Medicare Levy Surcharge If you do not have a proper level of private hospital cover and you earn above a certain income, you may have to pay the Medicare levy surcharge, which is on top of the Medicare levy, depending on your family circumstances and income. Different rate applies. Medicare levy surcharge can usually be avoided by taking out a private hospital. Cover for yourself, your spouse, and all of your dependents In FY 25, Other taxes and levies - HELP debt repayment if you have outstanding HELP debt and earn above $54,435, which is the compulsory repayment threshold, You may have your HELP repayments taken out through the taxation system. The amount you repay each year is a percentage of your repayment income. The percentage increases as your income increases. So the more you earn, the higher your repayment will be. Now one of my favorite tax calculator is tax calc. It's free and super easy to use. All you need to do is plugging in your taxable income. But wait what exactly is taxable income. Taxable income and common deductions Taxable income equals your assessable income minus any deductions. Assessable income is a total of all your income sources, including salary. Interest from savings. Dividends or distributions from investments. Rental income and so on. deductions are expenses you can subtract from your assessable income, reducing the amount you pay tax on. If you spend money on things directly related to earning your income, you can deduct those expenses. Common deductions include work related expenses, investment related expenses, personal deductible, super contributions, income protection premiums, charitable donations, and so on. To minimize your personal income tax, you will want to maximize your deductions. This video will give you more insights and details. Tax calculator Now we have a good understanding of the basics of the Australian personal income tax system. It's time to do some real calculations to see how all this works in practice. Let's head back to tax calc. by default it's set for Australia residents. The income you enter doesn't include your super. Also it assumes you don't have any help debt and you are not eligible for SAPTO. If you are curious about whether these apply to you, just click here to learn more. Remember our friend John who received a pay rise and now earns 145,000? But wait, he's got deductions worth 5000. So what's his taxable income. That's right. It's 140,000. let's put this figure into tax calc. And voila! We can instantly see how much tax including Medicare levy John needs to pay. If John has outstanding HELP debt, he will tick this box, and the result will have the HELP repayments included. PAYG system Now let's keep things simple and say John doesn't have any help debt and his only income is his salary. What happens here is that John's employer deducts tax from his salary before he even sees it. this is known as pay as you go or PAYG tax. His employer doesn't know about his deductions or other income. So they calculate the pay as you go tax based on his salary. this figure you see on the tax calculator is often the same as the pay as you go tax. each payslip John gets will show his salary, the tax that's been paid on his behalf and what he actually takes home. Fast forward to the end of the financial year. It's time for John to do his tax return. he will enter his income details. And importantly, those deductions we talk about And guess what? John's employer has paid more tax on his behalf than he actually owes, and he will get a tax refund. That's a nice bonus for being diligent with your deductions. Keep deductions organised speaking of being diligent with your deductions, easiest way is to download the ATO app, which allow you to take photos of receipts and documents during the year and save them directly onto the app. When it comes to tax time, you can import this information directly into your tax return. Lodge a tax return If your financial affairs are pretty straightforward, you might want to consider lodging your tax return by yourself. The deadline of the DIY route is 31st of October the following financial year. Technically, you can start lodge your tax return from 1st of July, but it may be easier to wait a few weeks. Because the ATO has data feed from employers and many financial institutions. after waiting for a few weeks, you'll find that a lot of the information is already pre-filled in the system. This saves you the hassle of collecting all your financial information and entering it manually. If you decide to go the DIY route, you can lodge your tax returns through my govt ATO. It's a super easy and very secure and the best part? Usually you get your refund back within just two weeks if your financial situation is a bit more complex or you just want the guidance of a professional, you can always hire accountant to do your tax return for you. And the cost of managing your tax is tax deductible. Congratulations. Now you have graduated from being a tax beginner. But did you know the headline tax free threshold of 18,200 can be a trap? Many people mistakenly aim to reduce their taxable income to 18,200 whenever they have strategies available to do so. Let me tell you 18,200 is not the magic number. And you can have more taxable income and still pay zero tax. Watch this video to learn more.