in this video I'm going to explain how the
Australian tax system works and how you can easily calculate how much you're going to pay in tax
each year on your tax return let's get straight into it the Australian tax system operates on a
progressive tax structure this means that the tax rates increase as your income Rises the more money
you earn the more you are taxed the Australian tax system consists of five tax brackets each
with its own tax rate if we go to the ATO website they provide a table of the Australian
tax brackets for the 2023-2024 financial year the first bracket is tax free so you can earn up
to eighteen thousand two hundred dollars and not have to pay any tax at all then moving on we have
what's called marginal tax rates once your income goes past the tax-free threshold you'll be taxed
on the remaining income based on your marginal tax rates marginal tax rates refer to the tax rates
applied to each portion of your income Within These tax brackets the second bracket charges
you 19 tax for any amount you earn between 18 201 and forty five thousand dollars the dirt bracket
charges you five thousand and ninety two dollars plus 32.5 percent for any amount between forty
five thousand and one dollars and one hundred twenty thousand dollars the fourth bracket charges
you 29 467 dollars plus 37 for any amount between one hundred and twenty thousand and one dollars
and one hundred and eighty thousand dollars and finally the fifth bracket charges you fifty one
thousand six hundred and sixty seven dollars plus forty five percent for any amount over 180 000
now you may be wondering what these amounts are and basically they are the maximum amount charged
for the previous tax brackets let me show you an example with my own table to help you understand
better James is a project manager who earns 220 000 per year let's work out how much tax James
would have to pay for the year using the tax brackets we start off with the first bracket which
is the tax free threshold so the first 18 200 will pay zero percent tax for the second bracket if
you earn between eighteen thousand two hundred dollars and forty five thousand dollars which is
twenty six thousand eight hundred dollars you will be taxed nineteen percent for that portion so
nineteen percent of twenty six thousand eight hundred is five thousand and ninety two dollars
this is the maximum amount of tax you can be charged on this bracket for the third bracket if
you earn between forty five thousand dollars and one hundred and twenty thousand dollars which is
seventy five thousand dollars in total you'll be taxed thirty two point five percent for that
portion so 32.5 of seventy five thousand is twenty four thousand three hundred 75 dollars
which is the maximum amount of tax you can be charged in this bracket for the fourth bracket
if you earn between 120 000 and 180 000 which is sixty thousand dollars you'll be taxed at thirty
seven percent for that portion so thirty seven percent of sixty thousand is twenty two thousand
two hundred dollars which is the maximum amount of Taxi can be charged in this bracket and for the
fifth bracket you'll be charged 45 for any amount over one hundred and eighty thousand dollars so
since James earns one hundred and twenty thousand dollars he will have forty thousand dollars in
this bracket taxed at forty five percent forty five percent or forty thousand dollars is eighteen
thousand dollars so if you total up all the tax from each bracket it comes to sixty nine thousand
six hundred sixty seven dollars which is the total tax payable for James but the tax does not end
there every Australian is charged an additional two percent Medicare Levy this Levy is to help
fund Australia's Public Health Care system so this bulk Bill doctor visits that you go to are
not entirely free you and many other Australian residents are helping to fund it by paying the
Medicare Levy through tax so James has to pay an extra two percent Medicare levy on his 220 000
which comes through four thousand four hundred dollars in addition if you earn over ninety three
thousand one dollars as a single or 186 thousand and one dollars as a family you'll be charged an
additional one percent Medicare Levy surcharge if you do not have an appropriate level or
private patient Hospital cover so the Australian government encourages High income earners to
sign up for Private health insurance to put less burdens on the hospitals funded by the public
health system and usually it's much cheaper to sign up for a qualifying Private health insurance
package than paying the surcharge so it's probably a good idea to do it if you're a high income
owner and if you're interested I'll leave a link down below to an article that explains the
Medicare Levy surcharge in Greater detail and how to avoid paying it so for this example let's
assume that James already has the correct level of Private health insurance therefore he'll be exempt
from paying the Medicare Levy surcharge so if we add up his income tax payable and his Medicare
Levy payable we get 74 067 this is his total tax payable now there is a common misconception that a
lot of people have about these tax brackets I also used to think this when I was younger and that is
once your salary hits a certain bracket or your salary is suddenly taxed at that higher rate so
for example if I was earning forty five thousand dollars and I received a pay rise of one thousand
dollars I used to think that the one thousand dollars will push me into the third tax bracket
and I would have to pay 32.5 on my entire salary I mean tax wasn't taught to me or many people
in school so I didn't know any better so it's only when I studied Finance at University that I
found out this was not true your income is charged progressively per bracket so if you ever get a
pay rise you'll only pay a higher tax rate on the portion that went over the bracket so in this
case only the extra one thousand dollars will be taxed at the higher 32.5 rate and not your entire
salary I hope all this is making sense to you so far and just to help you understand better I'll
go through a few more examples and show you how to easily calculate your tax a useful online tool
I like to use is this income tax calculator on the moneysmart website which is a calculator provided
by the government that does all the work for you and I will link it down below so feel free to
check it out so using this calculator in the first example Sally earns exactly forty five thousand
dollars per year and she wants to calculate how much tax she must pay for the year so using the
calculator let's enter forty five thousand here now from the tax table we know Sally falls into
the second tax bracket so the first 18 200 is tax free if we minus 45 000 by 18 200 we get twenty
six thousand eight hundred dollars this is the amount that we chat that 19 as per the second tax
bracket so twenty six thousand eight hundred times nineteen percent equals five thousand and ninety
two dollars this is Sally's income tax payable then we need to include the two percent Medicare
levy on forty five thousand dollars which is nine hundred dollars this Sally's Medicare Levy payable
so if we add them together that is five thousand nine hundred ninety two dollars this is the total
tax salary we'll have to pay for the year easy peasy right let's move on to the second example
Ben earns seventy thousand dollars per year and he wants to calculate how much tax he must pay for
the year so Ben falls into the third tax bracket so he'll be charged five thousand and ninety
two dollars up front which is the portion of income between eighteen thousand two hundred
one dollars and forty five thousand dollars as per the previous example with Sally then he'll
be charged 32.5 for any amount over forty five thousand so seventy thousand minus forty five
thousand is twenty five thousand dollars twenty five thousand times thirty two point five percent
is eight thousand one hundred twenty five dollars this Ben's income tax payable then we include
the two percent Medicare levy on Seventy thousand dollars which is one thousand four hundred dollars
this is Ben's Medicare Levy payable and if we add this all up the total is 14 617 it is the total
tax bin we'll have to pay for the year let's move on to the third example Mia earns 110 000
and received a twenty thousand dollars pay rise at the start of the financial year she wants the
calculator take-home pay before and after the pay rise so this is a perfect example to prove the
misconception that getting a pay rise may push you into a higher tax bracket which will lower
your take-home pay so let's look at scenario one before she received the pay rise 110 000 per year
puts her on the third tax bracket so let's put the table she must pay five thousand and ninety two
dollars plus 32.5 percent for any amount over forty five thousand dollars so 110 000 minus forty
five thousand is sixty five thousand dollars sixty five thousand times thirty two point five percent
is twenty one thousand one hundred and twenty five dollars so if we add 5092 and 21 125 we get 26
217 which is Mia's income tax payable then we include the two percent Medicare levy on 110 000
which is two thousand two hundred dollars and in this example Mia does have an appropriate level
of private patient Hospital cover so she does not need to pay an extra one percent on Medicare Levy
surcharge if we add all this up the total is 28 000 and 417 which is the income tax payable plus
Medicare Levy so if we subtract that from my total salary Mia's take home pay after income tax
and Medicare Levy is 81 583 now let's look at scenario two after Mia received a pay rise the
extra twenty thousand dollars increases Mia's total salary to 130 000 which pushes her to the
fourth tax bracket so if we follow the table she has to pay 29 467 which is just the total income
tax for one hundred twenty thousand dollars that leaves ten thousand dollars remaining which will
be taxed at thirty seven percent as per the fourth tax bracket so ten thousand times thirty seven
percent is three thousand seven hundred dollars if we add twenty nine thousand four hundred and sixty
seven dollars with three thousand seven hundred we get thirty three thousand one hundred sixty seven
dollars which is Mia's income tax payable then we include the two percent Medicare levy on one
hundred thirty thousand dollars which is two thousand six hundred dollars and again since Mia
has the correct Private health cover she does not need to pay the extra one percent Medicare Levy
surcharge if we add everything up the total is thirty five thousand seven hundred sixty seven
dollars which is the income tax payable plus the Medicare Levy if we subtract that from
my total salary Mia's take home pay of the income tax the Medicare Levy is 94 233 so if we
compare the two scenarios you'll see that after tax Mia will take home an extra twelve thousand
six hundred fifty dollars if she receives the twenty thousand dollars pay rise it's that simple
feel free to play around with this calculator for your own salary and see what you come up with
it is important to note that the tax rates may change each year so if you are watching this
video in the future make sure you look up the current tax rates for the current Financial Year
by the way if you enjoyed this video the secret word today is tree so comment it down below so
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more videos like this in the future and you don't want to miss them and if you're interested to
learn how you can legally reduce your attacks in Australia check out this video on screen where
I go over eight legal ways you can reduce your tax bill thank you for watching I appreciate
you and I'll see you in the next video [Music] thank you