Understanding Why Tax is Taken Out of Wages

When you receive a wage or salary in Australia, tax is automatically deducted before the funds reach your bank account. This system, called Pay As You Go (PAYG) withholding, ensures that individuals contribute to their tax obligations progressively throughout the year. Here’s how it works and what happens at tax time, especially if you have other income or deductions to consider.

Why Tax is Taken Out of Your Wage

Employers are required to withhold tax from your salary or wages on behalf of the Australian Taxation Office (ATO). The amount withheld depends on factors such as:

• Your income level
• The tax-free threshold (claiming the first $18,200 of income tax-free)
• Additional considerations (such as HECS/HELP debt or the Medicare levy surcharge)
  
  

Tax is withheld progressively to ensure most of your tax is covered by year-end. Your total tax payable or refundable amount is then calculated when you lodge your tax return.

What Happens at Tax Time?

The Australian financial year runs from 1 July to 30 June. At the end of each financial year, you must lodge your tax return by 31 October. This return reconciles the tax already withheld from your wages through PAYG with your total tax liability based on your income and deductions for the year.

If you use a registered tax agent, you may qualify for an extension until 15 May of the following year, allowing extra time to complete your return.

When you lodge your tax return, you report:

• Your salary or wages (with tax already withheld)
• Any additional income, such as interest, dividends, rental income, and capital gains from asset sales
• Deductions, which reduce your taxable income and may lower your tax payable.
  
  

The ATO will then determine whether you owe more tax or are entitled to a refund.

Income From Other Sources

In addition to wages, other types of income must also be reported in your tax return, including:

• Interest: Earnings from savings accounts or term deposits are taxable.
• Dividends: Dividends from shares are taxable, and franking credits can reduce tax liability for fully franked dividends.
• Rental Income: Income from rental properties is taxable; however, related expenses (e.g., mortgage interest, management fees) are deductible.
• Capital Gains: Profit from selling assets like shares or property is subject to capital gains tax, with a 50% discount if held over 12 months.
  
  

This is not an exhaustive list—other types of income, like foreign income or business profits, must also be reported.

How Deductions Reduce Your Tax

Deductions reduce your taxable income, lowering the amount of tax you owe. Common deductions include:

• Work-related car expenses: If you use your car for work, you may claim expenses such as fuel, maintenance, and depreciation.
• Work-related travel expenses: Travel for work-related purposes, such as attending meetings, allows you to claim expenses like flights and accommodation.
• Work-related clothing and laundry expenses: If your job requires specific uniforms or protective clothing, you can claim the cost of buying and laundering them.
• Self-education expenses: Education costs related to your current job, like courses to improve your skills, are deductible.
• Other work-related expenses: This includes tools, equipment, phone bills, and home office costs.
• Interest on investment loans: If you have borrowed to invest, the interest on the loan is tax-deductible.
• Charitable donations: Donations of $2 or more to registered charities are tax-deductible.
• Managing tax affairs: The cost of using a tax agent or other expenses related to managing your tax can be claimed.
  
  

This list is not exhaustive, and depending on your situation, there may be other deductions available to reduce your taxable income and maximise your refund.

Why Do You Get a Refund or Owe Money?

Once you’ve reported all your income and deductions, the ATO compares the tax you’ve already paid (via PAYG withholding) with your total tax liability. The result is either a refund or additional tax payable:

• Refund: If more tax has been withheld than what you owe (due to deductions or tax credits like franking credits), you’ll receive a refund.
• Tax Payable: If your PAYG withholding falls short of your total tax liability, especially if you’ve earned additional income from interest, dividends, rental income, or capital gains, you’ll need to pay the difference.
  
  

The PAYG system ensures that your tax is progressively paid throughout the year, but your final tax liability is determined when you lodge your return, based on your total income and deductions. Working with a registered tax agent can be highly beneficial, as they can help ensure you claim all eligible deductions and maximise your refund. They also deal with the ATO on your behalf, making the process simpler and less stressful. Plus, using a tax agent may give you until 15 May to lodge your return, giving you extra time to prepare and optimise your tax outcome.

If you need expert guidance on understanding your PAYG obligations or navigating tax time, reach out to us at 07 3194 3070 or hello@sheppardadvisory.com.au. Our team is here to help you stay compliant with the latest tax regulations and maximise your financial outcomes.