Personal & Business Tax

Your tax each year is calculated by taking into account the following elements:

1. PAYG Tax (paid out of your payslip)

2. Tax Adjustment (calculated at the end of each financial year)

Additionally, your HECS/HELP Loan repayments are treated in a similar manner and can impact your monthly income and tax return, which we will cover in the following lesson.

Australia uses a marginal tax rate system, meaning different portions of your income are taxed at different rates. You can find the current tax scale for Australian resident individuals for FY2024-2025 (excl. Medicare Levy) here.

Income up to each threshold is taxed at the preceding rate, then the next portion is taxed at the higher rate.

PAY-as-You-go (PAYG) Tax

The marginal rates above determine what your tax should be at the end of each financial year. However, in practice, the amount of tax deducted from your payslip is often determined by annualising your pay by using the ratio of the days in your pay period to the total number of days in the year and following

1. Annualise your periodic income:

Annualised Income = Monthly Income x 12

2. Calculate Annual Income Tax by applying marginal tax rates to the annualised income figure

3. Add the 2% Medicare Levy:

Medicare Levy = Annualised Income x 2%

4. Estimate the Total Annual Tax Liability:

Total Annual Tax Liability = Annual Income Tax + Medicare Levy

5. Calculate Monthly PAYG Withholding:

Monthly PAYG Withholding = Annual Tax Liability / 12

Example

To estimate your monthly PAYG tax on an income of $5,000 per month:

Annualise Income = $5,000 x 12 = $60,000
Calculate Annual Income Tax: Assume the marginal tax calculations yield approximately $10,000 in annual income tax.
Add Medicare Levy = $60,000 x 2% = $1,200
Total Annual Tax Liability = $10,000 + $1,200 = $11,200
Calculate Monthly PAYG Withholding = $11,200 / 12 ≈ $933

Tax on Bonuses & Commissions

You can blame the process described above if you have ever received a bonus and ultimately received a fraction of the total in your payslip.

This is because, if you get a bonus of say – $10,000 in a given month, this will almost certainly push your annualised estimate into the top marginal tax brackets, likely meaning you will feel like you are being taxed at a higher rate than your standard salary. This will take a chunk out of your upfront payment but you will likely receive some portion of it as part of your tax return.

Non-Monthly Payment Periods

If you’re paid monthly, your monthly pay is generally multiplied by 12. But if your pay period isn’t exactly a month (for instance, if you’re paid fortnightly or weekly), they calculate your annual income using the following formula:

Projected Annual Income = Income in Period x (365/Days in Period)

This ensures that the annual figure accurately reflects the actual number of days worked, which then determines the correct tax bracket and corresponding PAYG withholding.

Tax Adjustment

When you lodge your tax return, the ATO reviews your actual income, deductions, offsets (such as LITO), and any other income adjustments. This final calculation may differ from the estimates used by your employer.

Your Tax Adjustment is based on either:

● Over-Withholding: If your employer withheld more tax than required (perhaps due to additional deductions or lower income), you’ll receive a refund.

● Under-Withholding: If not enough tax was withheld, you’ll need to pay the shortfall.

The final tax bill reflects your true financial situation over the year, ensuring that you either receive any excess withholding back or pay any additional amount owed.

This process involves:

1. Calculating marginal tax owed on your Actual Income

2. Applying the Low Income Tax Offset (LITO) exemption

3. Recalculating the Medicare Levy based on Actual Income

5. Deducting any personal tax deductions

6. Adding your net capital gain for the financial year

Low Income Tax Offset (LITO)

The Low Income Tax Offset (LITO) is designed to lessen the tax burden for low-income earners by reducing the amount of income tax you pay. For individuals with taxable income below certain thresholds, LITO can significantly reduce—or even eliminate—the tax payable.

Maximum Offset: Individuals earning up to about $37,500 may receive the full $700 offset.
Phasing Out: As your income increases above $37,500, the offset decreases gradually.
Impact: For many low-income earners, LITO can reduce your tax liability to zero. However, if your income is higher, the offset diminishes.

Adjusted Medicare Levy

At the end of each financial year, the ATO recalculates your Medicare Levy liability, including any exemptions and thresholds.

You can find relevant rates here.

Taxable Income < Lower threshold = Full exemption

Taxable income between the two thresholds = Reduced levy calculated proportionally

Medicare Levy = (Taxable Income – Lower Threshold) x 10/(Upper Threshold – Lower Threshold)

Taxable income > Upper threshold = 2% of taxable income

Medicare Levy Surcharge (MLS)

The Medicare Levy Surcharge is an additional tax aimed at high-income earners who do not have appropriate private hospital cover. It is designed to encourage such individuals to take out private health insurance, thereby reducing pressure on the public system.

You can find relevant rates here.

For families, the income thresholds are roughly double, plus an additional amount per dependent child (typically around $1,500 per child).

It applies only to those without private hospital cover and is calculated on your total income for MLS purposes.

Personal Deductions

Personal deductions are expenses you incur in earning your income that you can claim on your tax return. These deductions reduce your assessable (taxable) income, meaning you pay tax on a lower amount. The more eligible deductions you claim, the lower your overall tax liability may be.

Common Personal Deductions Include:

● Car Expenses: Costs incurred when you use your vehicle for work purposes (e.g. travel between workplaces).

● Travel Expenses: Costs for work-related travel, including public transport, flights, tolls, and parking.

● Uniforms and Laundry: Expenses for buying and maintaining specific work uniforms (if required) or protective clothing.

● Self-Education Expenses: Course fees, textbooks, and related costs if the course maintains or improves your skills in your current job.

● Phone and Internet Expenses: If you use these services for work (beyond private use), you can claim a portion of your costs.

● Tools and Equipment: Costs for purchasing work-related tools or equipment, particularly if each item costs less than $1,000 (subject to low-cost asset rules).

● Work-Related Clothing: For occupations requiring specific clothing (beyond conventional business attire) which is not suitable for everyday wear.

Add Net Capital Gains & Losses

When you calculate your Capital Gains Tax (CGT) liability, your net capital gain is included in your assessable income. Here’s how capital gains and losses work together:

1. Net Capital Gain:

When you sell a capital asset (like shares or property), you first determine the capital gain by subtracting the asset’s cost base (purchase price plus associated costs, adjusted for factors like depreciation) from the sale proceeds. If you’ve held the asset for more than 12 months, you might be eligible for a CGT discount (typically 50% for individuals). The resulting figure is your net capital gain, which is added to your taxable income.

2. Net Capital Losses:

If, on the other hand, you incur a capital loss (selling an asset for less than its cost base), that loss can be used to reduce your capital gains in the same tax year. If your total capital losses exceed your capital gains, the net capital loss cannot be used to reduce your other types of income (like salary or business income). Instead, the excess loss is carried forward to future years. In those future years, it can be applied against any capital gains you realise, reducing your taxable income from those gains.

3. Impact on Your Tax Return:

On your tax return, you include your net capital gains (after applying any available discount) as part of your assessable income. Then, you offset those gains by any net capital losses from the current year (or carried forward from previous years). The remaining net capital gain (if any) is taxed at your marginal rate. If the offset brings your net capital gain to zero, you won’t pay any CGT for that year, but any remaining capital losses can continue to be carried forward.

Your Capital Gains Tax Liability (CGT Liability) is added to your assessable income each year using the following formula:

CGT Liability = Realised Capital Gains – Realised Capital Losses – Net Capital Losses Carried Forward

Sole Trader/Business Income

For individuals running their own business (often as a sole trader), business income is the profit you earn from your business activities. This profit is included in your personal tax return as part of your assessable income.

ScaleApp’s ‘Sole Trader Income’ assumption assumes that you are not registered for GST, and rather allows you to incorporate your net profit from your business. This does not incur PAYG tax, but is considered in estimating your Tax Adjustment each financial year.

Reporting Business Income:

● Gross Business Income: Total revenue from your business activities

● Allowable Deductions: Subtract business-related expenses (such as supplies, rent for office space, travel, and other operating costs).

● The result is your net business profit, which is then added to any other income you earn (like salary or interest).

● If your business is registered for GST (usually required if your annual turnover exceeds $75,000), you need to lodge a BAS—typically quarterly—to report GST collected and paid, along with any PAYG instalments.

● BAS helps you manage your tax obligations throughout the year rather than waiting until the annual tax return.

Business/Company Income & Dividends (Withdrawn)

ScaleApp currently allows you to account for company income paid out in the form of a salary via. the 'Sole Trader Income' assumption input, which ensures it is included in your tax adjustment estimate each financial year.

For dividends, add the gross dividend (dividend + franking credit) to your income, then calculate tax on that amount. Finally, reduce your tax liability by the franking credit. This adjustment gives a more accurate picture of the net income you receive from company profits. Note: This functionality is not currently included in ScaleApp.

Example: PAYG Tax & Adjustment

Gross Annual Salary at EOFY = $80,000

Marginal Tax Calculation:
- Income up to $18,200: $0
- Income from $18,201 to $45,000: ($45,000 – $18,200) = $26,800 at 19% → $5,092
- Income from $45,001 to $80,000: ($80,000 – $45,000) = $35,000 at 32.5% → $11,375
- Total Marginal Tax: $5,092 + $11,375 = $16,467
Apply Low Income Tax Offset (LITO):
- For an $80,000 income, the LITO is fully phased out → Offset = $0
Recalculate Medicare Levy:
- Medicare Levy = 2% of $80,000 = $1,600
Medicare Levy Surcharge (MLS):
- At $80,000, assume the MLS does not apply → MLS = $0
Deduct Personal Tax Deductions:
- Assume personal deductions of $2,000
- Adjusted tax after deductions = $16,467 – $2,000 = $14,467
Add Net Capital Gain:
- Assume a net capital gain of $5,000
- New tax liability = $14,467 + $5,000 = $19,467
Final Adjustment – PAYG and Medicare Levy Withheld:
- Assume throughout the year, PAYG tax and Medicare Levy totaling $20,000 were withheld.
- Final tax return = Withheld Amount – Total Tax Liability = $20,000 – $19,467 = $533 refund.

In this example, the taxpayer would receive an estimated refund of approximately $533 at EOFY.

Business Taxation: Sole Traders & BAS

A sole trader is a one-person business, and for tax purposes a sole trader’s business income is simply treated as part of their personal income. A sole trader does not file a separate “business tax return” – you include your business earnings and business expenses in your individual tax return (there’s a section for business schedule). You pay income tax on the net profit of the business at the same individual rates discussed above. Key considerations for sole traders include:

As a sole trader, you must keep records of your business income and allowable expenses. On your annual tax return, you declare all income (including business revenues, along with any salary, interest, etc.) and claim deductions for business costs. Only the taxable profit is taxed.

For example, if your tutoring business earned $50,000 in fees and you had $10,000 of expenses (travel, materials, etc.), you only pay tax on the $40,000 profit. You’ll still get the benefit of the $18,200 tax-free threshold and LITO, etc., because it’s your personal return. (If the business incurs a loss, it may offset other income in some cases.) All the tax rules (like Medicare levy, offsets, HELP repayments) apply to your combined income.

Unlike an employee, a sole trader doesn’t have an employer withholding tax from their business income. You are responsible for your own tax. Often, sole traders will pay quarterly PAYG instalments – the ATO may require you to pre-pay estimated tax each quarter (especially after your first year, once they know you have taxable income) to avoid a big bill at year end. These instalments work similar to PAYG withholding but for the self-employed (you might receive an instalment notice or have it included in your BAS). If your income varies or you’re just starting, you might simply pay the tax when you lodge your return. It’s important to set aside money for tax (a common suggestion is ~30% of your profit) so you’re not caught short if a tax bill comes.

If your sole trader business is registered for GST (Goods and Services Tax) – required if your annual turnover is >$75,000 – you need to lodge a BAS, usually quarterly. A BAS is a form where you report and pay various tax obligations for your business over a period (usually each quarter). This typically includes:

GST collected vs. GST paid: You report the GST you added to sales and the GST you paid on business purchases. The difference is sent to the ATO. For example, if in a quarter you invoiced $11,000 (which includes $1,000 GST) and bought supplies with $550 GST included, you’d report $1,000 GST collected and $550 GST credits, so you’d pay net $450 to the ATO.
PAYG instalments: If the ATO has you on quarterly income tax instalments, the BAS will include a section indicating how much income tax prepayment is due based on your profit. (Not all sole traders have this, but many do after the first year of profit.)
Other obligations: Larger businesses might report withheld tax if they have employees (PAYG withholding) or other taxes on the BAS, but a pure sole trader without employees mainly uses BAS for GST and possibly PAYG instalments.

Important: If you’re not registered for GST (e.g. a small side hustle earning under $75k), you generally don’t lodge BAS. In that case, you’ll just pay any income tax when you do your annual return (or via instalments if the ATO sets them up).

The key difference is who handles the tax throughout the year. An employee’s employer handles withholding tax, pays super contributions, and often things like leave and workers compensation – the employee just lodges a tax return to square up any differences. A sole trader, on the other hand, must manage all these obligations themselves. This means tracking income/expenses, putting aside money for tax and super, and dealing with the ATO directly. Sole traders may need to budget for GST (charging 10% on their sales and remitting it via BAS) and ensure they comply with reporting deadlines (usually quarterly BAS and an annual tax return).

For example, an employee earning $80,000 simply gets a payslip with tax taken out and can be fairly hands-off with ATO until tax time, whereas a sole trader earning $80,000 (from business profits) must actively calculate their tax liabilities, possibly lodge 4 BAS forms a year, and pay tax instalments. Both ultimately pay a similar amount of income tax on $80k, but the sole trader’s compliance workload is higher. The upside for sole traders is they have flexibility to claim a wide range of business deductions (home office, vehicle, tools, etc. as appropriate) which an ordinary employee might not. They also have control over their business decisions and finances, whereas an employee’s taxes are prehandled but their income is fixed by salary. In short: sole traders must be more hands-on with their tax – keeping good records and meeting ATO requirements – while PAYG employees have much of it done for them behind the scenes.

This content is based on information obtained from sources believed to be reliable and accurate at the time of publication, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no ongoing obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice, and do not constitute financial product advice.

We do not provide tax agent services. The information provided in this article should not be relied upon to satisfy liabilities or obligations that arise, or could arise, under a taxation law or to claim entitlements that arise, or could arise, under a taxation law. You should seek professional tax advice to understand your tax liabilities, obligations and entitlements.