Year 10 Maths Advanced Earning Money

Income Tax

Q: What is the Medicare levy?

It is an extra 2 percent of taxable income that helps pay for Australia's public health system. It is added on top of income tax.

20 practice questions 1 video lesson Theory + worked examples

Income tax is worked out from taxable income: all income, including wages, bonuses and bank interest, minus allowable deductions. The tax then comes from a table of tax rates, and the Medicare levy is added on top. In NSW Year 10 Advanced maths you use a current resident tax table to find tax payable and whether a refund is due (NESA outcome MA5‑FIN‑C‑01).

You will find taxable income, apply each row of the tax table, add the 2% Medicare levy and compare PAYG tax withheld with the tax owed. You will see why a deduction saves more tax at a higher income, how salary sacrifice and a rental loss lower taxable income, and how much of a bonus is kept. Harder questions work backwards from tax paid or take-home pay to the income, and write one row of the table as a linear formula. It is part of Year 10 Advanced Earning Money.

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Income Tax - Video - Australian Income Tax Watch

Theory

Income tax is worked out on taxable income: all your income minus allowable deductions. This Year 10 Advanced maths page covers the resident tax table, marginal tax rates, the Medicare levy, PAYG refunds, bonuses, salary sacrifice and working backwards from the tax paid.

Gross income is everything earned before tax: wages or salary, overtime, bonuses, leave loading, bank interest and other earnings. Allowable deductions are work-related costs and gifts that the tax office lets you subtract, such as uniforms, tools, union fees, work travel and donations to registered charities.

Taxable income $=$ gross income $-$ allowable deductions. Tax is calculated on this amount using the tax table. Australia uses marginal rates: each rate applies only to the dollars within its band, not to the whole income.

The Medicare levy is an extra $2\%$ of taxable income that helps fund public health care. Through the year, employers withhold tax from each pay under PAYG (pay as you go). After the tax return, if more was withheld than is owed, the difference is a refund; if less, the taxpayer owes the difference.

Salary sacrifice into superannuation and a loss on a rental property (negative gearing) both lower taxable income, and so lower tax.

Each rate applies only to the dollars inside its band, so a pay rise never lowers your take-home pay.

Work out taxable income first, then the tax on it, then compare with what was already withheld.

\[\text{taxable income} = \text{gross income}-\text{deductions}\]

taxable income = gross income - deductions

Taxable income	Tax payable (2026–27 resident rates)
$\$0$–$\$18\,200$	Nil
$\$18\,201$–$\$45\,000$	$15$c for each $\$1$ over $\$18\,200$
$\$45\,001$–$\$135\,000$	$\$4020$ plus $30$c for each $\$1$ over $\$45\,000$
$\$135\,001$–$\$190\,000$	$\$31\,020$ plus $37$c for each $\$1$ over $\$135\,000$
$\$190\,001$ and over	$\$51\,370$ plus $45$c for each $\$1$ over $\$190\,000$

Where the fixed amounts come from. Each fixed amount is the total tax on all the income below that row, built up from the rates of the rows above it. So the fixed amounts also tell you the tax at each threshold, which is how you find the row when working backwards.

A row as a formula. Expanding a row gives a linear formula for the tax \(T\) on income \(I\). In the \(15\)c row, \(T = 0.15(I-18\,200) = 0.15I-2730\). In the top row, \(T = 51\,370+0.45(I-190\,000) = 0.45I-34\,130\). Formulas like these make it easy to set up equations.

Average tax rate \(= \dfrac{\text{total tax}}{\text{taxable income}}\times 100\%\). It is always lower than the marginal rate on the last dollar.

How to calculate income tax

Add every source of income for the year (convert weekly or fortnightly pay with $\times 52$ or $\times 26$).
Subtract the allowable deductions to get the taxable income. Ignore cents if the question says so.
Find the row of the tax table that contains the taxable income.
Calculate: fixed amount $+$ rate $\times$ (income $-$ lower limit of the row).
Add the Medicare levy ($2\%$ of taxable income) if asked.
Compare with the PAYG tax withheld to find a refund or an amount owed.

Other question types

Saving from a deduction or extra tax on a bonus: multiply the amount by the marginal rate (plus $2\%$ for the levy). If it crosses a threshold, split it (Example 3).
Working backwards: use the fixed amounts to find the row, then solve the equation for $I$ (Example 4). Always check the answer lies in that row.
Target take-home pay: write income $-$ tax $-$ levy $=$ target, using the row formula, and solve. If the answer falls outside the row, try the next row.
Deductions at a rate: work-from-home hours $\times$ cents per hour, car travel km $\times$ cents per km.
Comparing jobs or choices: find the money left after tax for each option, including bonuses, leave loading or rental losses, then subtract.

Example 1 — Taxable income and tax

Liam earns $\$1785$ a week for $52$ weeks and $\$310$ in bank interest. He claims deductions for tools $\$640$, a work phone $\$275$ and a charity donation $\$85$. Using the tax table, find
(i) his taxable income
(ii) his income tax.

Solution

(i) Add all income, then subtract all deductions.

$1785\times 52$	$=$	$\$92\,820$
$\text{deductions}$	$=$	$640+275+85 = \$1000$
$\text{taxable income}$	$=$	$92\,820+310-1000$
	$=$	$\mathbf{\$92\,130}$

(ii) $\$92\,130$ is in the $\$45\,001$–$\$135\,000$ row.

$\text{tax}$	$=$	$4020+0.30\times(92\,130-45\,000)$
	$=$	$4020+0.30\times 47\,130$
	$=$	$4020+14\,139$
	$=$	$\mathbf{\$18\,159}$

4020 + 0.30 \times 47130 = 18159

Example 2 — Medicare levy and a refund

Chloe's taxable income is $\$58\,400$. Her employer withheld $\$10\,950$ in PAYG tax during the year. The Medicare levy is $2\%$ of taxable income. Does she get a refund, or does she owe money? How much?

Solution

Find what she actually owes: income tax plus the Medicare levy.

$\text{tax}$	$=$	$4020+0.30\times(58\,400-45\,000)$
	$=$	$4020+4020 = \$8040$
$\text{levy}$	$=$	$0.02\times 58\,400 = \$1168$
$\text{total}$	$=$	$\$9208$

Compare with the PAYG tax already withheld:

$10\,950-9208$

$=$

$\$1742$

10950 - 9208 = 1742

More was withheld than she owes, so she gets a refund of $\mathbf{\$1742}$.

Example 3 — A bonus across a threshold

Tom's taxable income is $\$41\,000$ before an $\$8000$ bonus. The Medicare levy is $2\%$.
(i) How much extra tax and levy does he pay because of the bonus?
(ii) What percentage of the bonus does he keep?

Solution

(i) The bonus takes him from $\$41\,000$ to $\$49\,000$, across the $\$45\,000$ threshold. Split it at the threshold.

$4000\text{ at }15\text{c}$	$=$	$\$600$
$4000\text{ at }30\text{c}$	$=$	$\$1200$
$\text{levy on }8000$	$=$	$\$160$
$\text{extra}$	$=$	$\mathbf{\$1960}$

600 + 1200 + 160 = 1960

(ii) He keeps $8000-1960 = \$6040$, and $\dfrac{6040}{8000}\times 100\% = \mathbf{75.5\%}$.

Only the dollars above $\$45\,000$ are taxed at $30$c. The rest of his income is taxed exactly as before.

Example 4 — Working backwards from the tax

Ella paid $\$12\,300$ in income tax. Using the tax table, find her taxable income.

Solution

Decide the row from the fixed amounts. The tax on $\$45\,000$ is $\$4020$ and on $\$135\,000$ it is $\$31\,020$. $4020 \lt 12\,300 \lt 31\,020$, so her income is in the $\$45\,001$–$\$135\,000$ row.

$4020+0.30(I-45\,000)$	$=$	$12\,300$
$0.30(I-45\,000)$	$=$	$8280$
$I-45\,000$	$=$	$27\,600$
$I$	$=$	$\mathbf{\$72\,600}$

4020 + 0.30 (I - 45000) = 12300

Check: $4020+0.30\times 27\,600 = 4020+8280 = 12\,300$. The answer is in the row assumed.

Common pitfalls

The top rate does not apply to all income. Someone earning $\$60\,000$ does not pay $30\%$ of $\$60\,000$. Only the dollars over $\$45\,000$ are taxed at $30$c, on top of the fixed $\$4020$.

Subtract the lower limit of the row. In the $30$c row use $I-45\,000$, not $I-45\,001$ and not $I$ itself.

Include all income. Bank interest, bonuses and side jobs are part of gross income, even if no tax was withheld from them.

Medicare is on taxable income. The levy is $2\%$ of taxable income, not of the tax and not of gross income before deductions.

Check the row when working backwards. If the income you find is outside the row you assumed, the assumption was wrong. Use the fixed amounts to choose the row first.

Frequently asked questions

How do you calculate taxable income?

Add up all your income for the year, including wages, bonuses and interest, then subtract your allowable deductions such as work expenses and charity donations.

How do you use the Australian tax table?

Find the row that contains your taxable income. Take the fixed amount for that row and add the rate times the number of dollars above the lower limit of the row.

What is a marginal tax rate?

It is the rate paid on the next dollar earned. With the 2026–27 rates, someone earning $\$80\,000$ has a marginal rate of $30$c in the dollar, but their average rate is much lower.

Can a pay rise put you in a higher tax bracket and leave you worse off?

No. Only the dollars above the threshold are taxed at the higher rate. The rest of your income is taxed exactly as before, so a pay rise always leaves you with more after tax.

How do you work out a tax refund?

Find your income tax plus Medicare levy for the year. Subtract it from the PAYG tax your employer withheld. A positive answer is a refund; a negative answer is an amount you owe.

What is the Medicare levy?

It is an extra $2\%$ of taxable income that helps pay for Australia's public health system. It is added on top of income tax.

Taxable income	Tax payable (2026–27 resident rates)
\(\$0\)–\(\$18\,200\)	Nil
\(\$18\,201\)–\(\$45\,000\)	\(15\)c for each \(\$1\) over \(\$18\,200\)
\(\$45\,001\)–\(\$135\,000\)	\(\$4020\) plus \(30\)c for each \(\$1\) over \(\$45\,000\)
\(\$135\,001\)–\(\$190\,000\)	\(\$31\,020\) plus \(37\)c for each \(\$1\) over \(\$135\,000\)
\(\$190\,001\) and over	\(\$51\,370\) plus \(45\)c for each \(\$1\) over \(\$190\,000\)

\(1785\times 52\)	\(=\)	\(\$92\,820\)
\(\text{deductions}\)	\(=\)	\(640+275+85 = \$1000\)
\(\text{taxable income}\)	\(=\)	\(92\,820+310-1000\)
\(\)	\(=\)	\(\mathbf{\$92\,130}\)

\(\text{tax}\)	\(=\)	\(4020+0.30\times(92\,130-45\,000)\)
\(\)	\(=\)	\(4020+0.30\times 47\,130\)
\(\)	\(=\)	\(4020+14\,139\)
\(\)	\(=\)	\(\mathbf{\$18\,159}\)

\(\text{tax}\)	\(=\)	\(4020+0.30\times(58\,400-45\,000)\)
\(\)	\(=\)	\(4020+4020 = \$8040\)
\(\text{levy}\)	\(=\)	\(0.02\times 58\,400 = \$1168\)
\(\text{total}\)	\(=\)	\(\$9208\)

\(4000\text{ at }15\text{c}\)	\(=\)	\(\$600\)
\(4000\text{ at }30\text{c}\)	\(=\)	\(\$1200\)
\(\text{levy on }8000\)	\(=\)	\(\$160\)
\(\text{extra}\)	\(=\)	\(\mathbf{\$1960}\)

\(4020+0.30(I-45\,000)\)	\(=\)	\(12\,300\)
\(0.30(I-45\,000)\)	\(=\)	\(8280\)
\(I-45\,000\)	\(=\)	\(27\,600\)
\(I\)	\(=\)	\(\mathbf{\$72\,600}\)

Income Tax

📖 Theory

How to calculate income tax

Other question types

Common pitfalls

Frequently asked questions

Theory