During our lifetime we all pay tax on our income at some point. This is called Pay As You Go tax (PAYG). In Australia, our PAYG is a progressive tax, which means the more you earn the more you pay. This and all other taxes are defined as the contribution to the government revenue compulsorily levied on individuals, property, businesses, goods etc. This money is used to provide those services we expect in our society, roads, hospitals, schools etc.
PAYG tax can be confusing, especially if you have a varied income. Some weeks you will only earn a small amount and so may not pay tax at all but the next you will work extra hours perhaps even on a weekend and suddenly you lose a lot in tax. In Australia, our rate of PAYG is based on our annual income but this is calculated based on each pay event. Below is a table from the Australian Taxation Office (ATO) showing the individual resident rates of tax for the 2018-2019 financial year.
|Taxable Income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,000 – $180,000||$20,797 plus $37c for each $1 over $90,000|
|$180,000 and over||$54,097 plus 45c for each $1 over $180,000|
**These rates do not include the Medicare levy.
For a lot of people where the confusion will come in is when they are changing tax brackets because of their variable earnings. If you are a part-time or casual worker but perhaps do some extra work during holidays or peak work periods you could see your weekly income move from the second tax bracket to the third, which means a significant increase in your tax for the week. It doesn’t necessarily mean you are going to earn over $37,001 for the year but because our tax is calculated on each pay event you will be taxed that period as if you are.
For a working example, we have someone who works casually and this week earns $519 before tax. They would pay $41 that week in tax. The next week is busy and they work extra shifts and earn $769 for the week, the amount of tax is $102. When we look at the weeks individually the employee has jumped up in tax brackets. Come to the end of the financial year they have only earnt $30,000 for the year. They will be issued with a PAYG statement showing this and also the amount of tax they are have paid throughout the year. This is when the ATO will look at those amounts and a refund would be issued for the overpaid tax.
For many Australians they find this confusing and unfair, however, the alternatives can be even more confusing and can result in people having large tax bills at the end of the financial period to pay resulting in hardship and meaning that the Government doesn’t get the income it is expecting. This can have serious flow-on effects for all of the economy.
Please note this article provides general advice and examples, it has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today.