Australian income tax is a progressive system — you pay a higher rate on each additional dollar you earn, but only on the portion that falls within each bracket. You do not pay the top rate on your entire income. Once you understand how the brackets stack, the Medicare levy applies, and tax offsets reduce your bill, the system becomes straightforward.
Key Takeaways
- Australia uses a progressive tax system — higher rates apply only to income above each threshold
- Your effective tax rate (total tax as a percentage of income) is always lower than your marginal rate
- Employers collect tax through PAYG withholding; your annual return reconciles the final amount
- The Medicare levy adds 2% on top of income tax for most taxpayers
- The Low Income Tax Offset (LITO) reduces tax for those earning under $66,667
Step 1 — Your Taxable Income
Your taxable income is not the same as your gross income. It is your total assessable income minus your allowable deductions.
Assessable income includes:
- Wages and salary
- Business income
- Rental income
- Interest and dividends
- Capital gains (net)
Allowable deductions reduce this figure. Common deductions include work-related expenses, investment-related expenses, and personal super contributions claimed under the personal deductions schedule.
The result — assessable income minus deductions — is your taxable income.
Step 2 — Apply the Tax Brackets
Australia’s resident tax rates for FY2025–26:
| Taxable Income | Tax on This Bracket |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $135,000 | $5,092 + 32.5c for each $1 over $45,000 |
| $135,001 – $190,000 | $34,342 + 37c for each $1 over $135,000 |
| $190,001 and over | $54,682 + 45c for each $1 over $190,000 |
Source: ATO, FY2025–26 resident tax rates
These brackets are cumulative. A person earning $80,000 pays:
- Nil on the first $18,200
- 19% on $18,201–$45,000 ($5,092)
- 32.5% on $45,001–$80,000 ($11,375)
- Total: $16,467 income tax
Step 3 — Add the Medicare Levy
The Medicare levy is 2% of your taxable income and funds Australia’s public health system. It is calculated separately and added to your income tax liability.
On a $80,000 income: $80,000 × 2% = $1,600 Medicare levy
Those earning below the low-income threshold ($26,000 for individuals in FY2025–26) pay a reduced levy or none at all. The levy phases in between approximately $26,000 and $32,500.
See also: Medicare Levy Explained and Medicare Levy Surcharge
Step 4 — Apply Tax Offsets
Tax offsets reduce the amount of tax payable, dollar for dollar. The most widely applicable offset is the Low Income Tax Offset (LITO):
| Income | LITO Available |
|---|---|
| Up to $37,500 | $700 |
| $37,501 – $45,000 | Reduces by 5c per $1 |
| $45,001 – $66,667 | Reduces by 1.5c per $1 |
| Above $66,667 | Nil |
On a $80,000 income, LITO is $0 (income too high). On a $40,000 income, LITO is $575 (partly phased out).
Offsets cannot reduce your tax below zero — they are non-refundable unless specifically designated as refundable (franking credits are a notable exception).
Step 5 — Tax Payable vs Tax Withheld
If you are an employee, your employer has been deducting tax from each pay using the PAYG withholding system. When you lodge your tax return:
- If too much was withheld → you receive a refund
- If too little was withheld → you have a tax bill
- If the amounts match → no refund or bill
The difference is reconciled when the ATO processes your return, usually within two weeks for electronically lodged returns.
Marginal vs Effective Tax Rate
Your marginal tax rate is the rate on your last dollar of income. Your effective tax rate is your total tax divided by your total income.
At $80,000 income (before Medicare levy):
- Income tax: $16,467
- Medicare levy: $1,600
- Total tax: $18,067
- Effective rate: 22.6%
- Marginal rate: 32.5%
The marginal rate is useful for decision-making at the margin (e.g., “should I work overtime?”). The effective rate tells you what you actually pay overall.
See: Marginal vs Effective Tax Rate Explained
Frequently Asked Questions
Do I need to lodge a tax return every year? You generally need to lodge if your taxable income exceeds the tax-free threshold ($18,200), you have tax withheld from your wages, or you receive investment or business income. The ATO provides a no-lodge checker for those who may be exempt.
Why does my payslip show a different tax amount to what I expected? PAYG withholding is calculated on an annualised basis — your employer applies the bracket rates assuming you earn the same amount every pay cycle. If your income fluctuates or you have deductions to claim, your tax return adjusts the final figure.
What is the lowest income at which I pay any tax in Australia? The tax-free threshold is $18,200. However, once you factor in the LITO, the effective tax-free threshold rises to about $26,000 (below which the offset eliminates the tax liability). The Medicare levy applies above a separate, lower threshold.
How does superannuation interact with my income tax? Your employer’s super contributions (12% of ordinary time earnings) are not included in your assessable income — they are taxed separately in the super fund at 15%. Salary sacrifice contributions also reduce your taxable income. See the superannuation section for full details.
When are the ATO tax brackets updated? The ATO announces tax rates for each financial year. FY2025–26 rates have been fixed. The stage 3 tax cuts took effect in FY2024–25 and significantly restructured the bracket thresholds.
This article provides general tax information. For advice tailored to your situation, speak with a registered tax agent or accountant. Find one through the Tax Practitioners Board register.