Australian Income Tax — Complete Guide to Rates, Brackets and How It Works

Australia’s income tax system is progressive — the more you earn, the higher the rate on each additional dollar. But your entire income is not taxed at one rate. Each dollar is taxed according to the bracket it falls into, which means understanding the difference between your marginal tax rate and your effective tax rate matters enormously for financial planning.

This cluster covers how the Australian income tax system works from the ground up: the official ATO tax brackets, the Medicare levy, PAYG withholding, and how different types of income are treated.

How Income Tax Works

• How Australian Income Tax Works — A plain-English walkthrough from gross income to tax payable, including the role of offsets and the Medicare levy
• Australian Tax Brackets 2025–26 — The four income brackets, the rates that apply to each, and a worked example at common salary levels
• Marginal vs Effective Tax Rate Explained — The most misunderstood concept in Australian tax — your marginal rate is not what you pay on all your income
• Australian Tax Year Explained (1 July – 30 June) — Why the Australian tax year runs July to June and what that means for reporting and deadlines

Medicare Levy

• Medicare Levy Explained — Who pays the 2% Medicare levy, the low-income threshold below which it phases in, and how it appears on your tax return
• Medicare Levy Surcharge — Who Pays It — The additional 1–1.5% that applies to higher earners without adequate private hospital cover, and the income thresholds

How Tax Is Collected

• PAYG Withholding Explained — How employers deduct tax from wages before you receive them, and why your tax return reconciles the difference
• PAYG Instalments — When and How — For investors, sole traders, and others with income not subject to PAYG withholding

Tax on Specific Income Types

• Tax on a Second Job in Australia — Why a second job appears to be taxed at a higher rate, and how to manage your withholding
• Tax on Freelance and Contractor Income — ABN invoicing, no withholding, PAYG instalments, and quarterly obligations
• Tax on Dividends, Interest and Rental Income — How passive income is treated differently from wages
• How a Bonus Is Taxed in Australia — Why your bonus appears to be taxed heavily and how the annual reconciliation corrects this
• Tax on Redundancy Payments — Genuine redundancy tax-free amounts, the $12,524 base plus annual component, and excess tax treatment
• Tax on Termination and Leave Payouts — How unused annual leave and long service leave payouts are taxed on termination

Residency and Foreign Income

• Australian Tax Residency Rules — How the ATO determines whether you are an Australian tax resident, and why it matters
• How Foreign Income Is Taxed in Australia — Declaring overseas income, foreign income tax offsets, and double tax agreements
• Double Tax Agreements Australia — The network of DTAs that prevent the same income being taxed twice

High Earners and Business

• Tax on High Income in Australia ($180k+) — The 45% bracket, Division 293 super surcharge, and strategies high earners use
• Company Tax Rate Australia — The 25% rate for small businesses and 30% for larger companies
• Sole Trader vs Company Tax Compared — When it makes financial sense to incorporate versus staying as a sole trader
• Am I Paying Too Much Tax? — Common reasons Australians overpay tax and how to check your withholding is correct

Australian Income Tax Rates — FY2025–26

Plus 2% Medicare levy on taxable income above the low-income threshold. Tax-free threshold applies to Australian residents only.

The Stage 3 tax cuts (effective FY2024–25) reduced the rate on the $45,001–$135,000 bracket and extended it significantly. This benefited middle-income earners at the $90,000–$135,000 range most substantially.

Effective vs Marginal Tax Rate — Why It Matters

Your marginal rate (the rate on each additional dollar) is often significantly higher than your effective rate (total tax ÷ total income). This matters for:

• Comparing job offers with different structures
• Evaluating salary sacrifice into super (which saves tax at your marginal rate)
• Understanding the true cost of earning extra income

Example at $100,000 gross salary:

• Total income tax: $23,217
• Medicare levy: $2,000
• Total tax: $25,217
• Effective rate: 25.2% (not 32.5%, which is the marginal rate)
• Marginal rate: 32.5% (each extra dollar earned is taxed at 32.5%)

PAYG Withholding — How Your Employer Deducts Tax

Employers in Australia are required to withhold income tax from employee wages under the Pay As You Go (PAYG) withholding system. This means:

• Tax is collected throughout the year, not in a lump sum at year-end
• Withholding rates are based on ATO tax tables and assume the job is your only income
• When you lodge your tax return, the ATO reconciles the amounts withheld against your actual tax liability — you receive a refund or must pay the shortfall

Common reasons you may receive a large refund:

• You had significant work-related deductions
• Your income was lower than the withholding tables assumed
• You claimed deductions (rental property losses, self-education, donations)

Common reasons you may owe money:

• You had multiple jobs (each withheld tax assuming it was your only income)
• You earned investment income not subject to PAYG withholding
• Your HECS withholding was insufficient

Superannuation and Income Tax

Employer super contributions (11.5% in FY2024–25) are not included in your taxable income — they go directly to your super fund and are taxed at 15% inside the fund (concessional rate). This is one of the core tax advantages of superannuation.

Salary sacrifice into super (voluntary pre-tax contributions) reduces your taxable income further, potentially pushing you into a lower effective tax bracket or reducing the amount of tax withheld per fortnight.

High earners above $250,000 in combined income and super contributions pay an additional 15% Division 293 tax on concessional contributions — bringing their super tax rate to 30% rather than 15%.

Frequently Asked Questions

At what income do I start paying tax in Australia?

Australian residents pay no income tax on the first $18,200 of income (the tax-free threshold). Once combined with LITO, the effective tax-free threshold is approximately $21,884 before any net income tax applies. You should still lodge a tax return even if below the threshold to claim any PAYG withholding refund.

How is tax different for working holiday makers?

Working holiday makers (WHMs) on visa subclasses 417 and 462 are taxed at a flat 15% on their first $45,000 of income (the WHM tax rate), without access to the tax-free threshold. They do not qualify for LITO. They pay the same Medicare levy as residents if they are eligible for Medicare.

Can I reduce my income tax through super contributions?

Yes — salary sacrificing into super reduces your taxable income and is taxed at only 15% inside the fund (rather than your marginal rate). For someone on the 32.5% marginal rate, salary sacrificing $10,000 saves $1,750 in tax per year. Concessional contributions are capped at $30,000 per year (FY2025–26), including your employer’s SG contributions.

Stage 3 Tax Cuts — What Changed From 1 July 2024

The redesigned Stage 3 tax cuts that took effect from 1 July 2024 restructured Australian tax brackets significantly compared to the original legislated version:

Key changes: The 32.5% bracket was extended from $120,000 to $135,000 (benefiting middle-income earners). The 37% bracket threshold was raised from $120,000 to $135,000. The top 45% rate threshold remained at $190,000.

The average tax cut was approximately $1,888/year, with the largest dollar benefit going to earners in the $120,000–$190,000 range. Earners under $45,000 received a smaller benefit — approximately $400–$800/year.

Medicare Levy vs Medicare Levy Surcharge

These two items are frequently confused:

Medicare levy (2%): Paid by most Australian residents as a contribution to the public health system. Applies to all taxable income. Reduced or eliminated for low-income earners (below $26,000 for FY2024–25).

Medicare levy surcharge (1%–1.5%): An additional penalty for higher-income earners (over $93,000 for singles) who do not hold private hospital cover. Taking out private hospital cover eliminates the surcharge.

This cluster provides general tax information only. Tax rules are complex and individual circumstances vary significantly. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.