How Australian Income Tax Works
Australia uses a progressive tax system, which means the more you earn, the higher the rate you pay — but only on the portion of income that falls within each bracket. You never pay the top rate on your entire income.
The Australian financial year runs from 1 July to 30 June. So FY2025–26 covers 1 July 2025 to 30 June 2026. Your tax is calculated on your total taxable income for that period, which is your gross income minus any allowable deductions.
The Tax Formula — Step by Step
- 1Gross Income: All income from employment, investments, business, and other sources.
- 2Less: Deductions: Subtract allowable work-related expenses, donations, and other deductions.
- 3= Taxable Income: The figure your tax is calculated on.
- 4Apply Tax Brackets: Calculate tax on each portion of income at the applicable rate.
- 5Less: Tax Offsets: Subtract LITO, LMITO (if applicable), and other offsets directly from tax owed.
- 6Add: Medicare Levy: Add 2% Medicare Levy (and surcharge if applicable).
- 7= Total Tax Payable: Your final tax bill for the year.
Throughout the year, your employer withholds estimated tax from each pay under the PAYG (Pay As You Go) withholding system and sends it to the ATO on your behalf. When you lodge your tax return after 30 June, the ATO calculates your actual tax liability. If too much was withheld, you get a refund. If too little, you pay the difference.
The ATO administers Australia's tax system. Most Australians lodge their tax return online through myTax (via myGov) or through a registered tax agent. The lodgement deadline is 31 October each year for individuals lodging their own return, or later if you use a tax agent.
FY2025–26 Tax Brackets Explained
For FY2025–26, the Stage 3 tax cuts that took effect from 1 July 2024 remain in place. These cuts reduced the 32.5% bracket and expanded the 19% bracket, delivering tax relief to most Australian workers. Here are the current rates for Australian tax residents:
| Taxable Income | Tax Rate | Tax on This Portion |
|---|---|---|
| $0 – $18,200 | 0% | Tax-free threshold — no tax on this portion |
| $18,201 – $45,000 | 19% | 19 cents for each $1 over $18,200 |
| $45,001 – $135,000 | 32.5% | $5,092 + 32.5 cents for each $1 over $45,000 |
| $135,001 – $190,000 | 37% | $34,342 + 37 cents for each $1 over $135,000 |
| $190,001+ | 45% | $54,742 + 45 cents for each $1 over $190,000 |
Worked Example — $90,000 Salary
After applying LITO ($0 at $90k) and Medicare Levy ($1,800), total tax = $21,517. Effective rate: 23.9%. Marginal rate: 32.5%.
Foreign Residents & Working Holiday Makers
Foreign residents for tax purposes do not get the tax-free threshold. They pay a flat 30% on the first $135,000 of income, then 37% up to $190,000, and 45% above that. They also do not receive LITO.
Working holiday makers (visa subclass 417 or 462) pay 15% on the first $45,000 of income, then standard foreign resident rates above that. They are also not entitled to the tax-free threshold.
Offsets, Levies & Surcharges
Once your base income tax is calculated, several adjustments are applied. Tax offsets reduce the amount of tax you owe (they are not deductions — they come off the tax itself). Levies and surcharges add to your tax bill.
Low Income Tax Offset (LITO)
LITO is available to Australian residents. The maximum offset is $700 for taxable incomes up to $37,500. It phases out at 5 cents per dollar from $37,500 to $45,000, then at 1.5 cents per dollar from $45,000 to $66,667. Above $66,667, LITO is zero.
LITO is applied automatically when you lodge your tax return — you don't need to claim it separately. It means that in practice, Australian residents pay no income tax until their income exceeds approximately $21,884 (once LITO is factored in).
Medicare Levy (2%)
The Medicare Levy is a 2% charge on your taxable income that funds Australia's public health system. Most Australian residents pay it. Low-income earners below approximately $26,000 (singles) may be fully or partially exempt.
The phase-in range for FY2025–26 runs from approximately $26,000 to $32,500, where only 10 cents per dollar of income above the threshold applies. Families have a higher threshold based on the number of dependants.
Medicare Levy Surcharge (MLS) — 1% to 1.5%
The MLS is an additional charge on top of the standard 2% Medicare Levy. It applies to Australian residents who earn above the MLS threshold and do not hold an appropriate level of private hospital cover.
| Income (Singles) | MLS Rate |
|---|---|
| Up to $101,000 | No MLS |
| $101,001 – $118,000 | 1.0% |
| $118,001 – $157,000 | 1.25% |
| $157,001+ | 1.5% |
For many people earning over $101,000, taking out basic private hospital cover costs less than the MLS — making it financially worthwhile even if you rarely use private health.
HELP / HECS Repayments
If you have a Higher Education Loan Program (HELP) or HECS debt, repayments are made through the tax system. For FY2025–26, repayments begin once your income exceeds $67,000 at a rate of 1%, rising progressively to 10% for the highest incomes.
HELP repayments are calculated on your repayment income, which includes your taxable income plus any reportable fringe benefits and total net investment losses. Repayments are not tax-deductible. The debt is indexed annually to CPI on 1 June each year.
Superannuation Explained
Superannuation (super) is Australia's compulsory retirement savings system. Your employer is legally required to contribute a percentage of your ordinary time earnings into a super fund on your behalf. This is called the Superannuation Guarantee (SG).
SG Rate FY2025–26
12.0%
Final rate after staged increases from 9.5%
Concessional Cap
$30,000
Pre-tax contributions limit per year
Non-Concessional Cap
$120,000
After-tax contributions limit per year
How Super is Taxed
Super is one of the most tax-effective savings vehicles in Australia. Employer contributions and salary-sacrificed contributions (called concessional contributions) are taxed at a flat 15% inside your super fund — far lower than most people's marginal income tax rate.
Investment earnings inside super are also taxed at a maximum of 15% (or 10% for capital gains held longer than 12 months). Once you turn 60 and retire, withdrawals from a taxed super fund are completely tax-free.
High-income earners (those with income plus concessional contributions exceeding $250,000) pay an additional 15% tax on their concessional contributions — known as Division 293 tax — bringing their effective super tax rate to 30%.
Salary Sacrifice to Super
Salary sacrifice allows you to redirect pre-tax salary into your super fund. Because these contributions are taxed at 15% inside super rather than your marginal rate (which could be 32.5%, 37%, or 45%), salary sacrifice can significantly reduce your tax bill while boosting your retirement savings.
The total concessional contributions cap (employer SG + salary sacrifice + personal deductible contributions) is $30,000 per year for FY2025–26. If your super balance is under $500,000, you can carry forward unused cap amounts from the previous five years.
Work-Related Deductions Guide
A tax deduction reduces your taxable income, which in turn reduces the tax you pay. To claim a work-related deduction, the ATO requires that: (1) you spent the money yourself and weren't reimbursed, (2) the expense is directly related to earning your income, and (3) you have a record to prove it.
Car & Travel
You can claim car expenses for work-related travel using either the cents-per-kilometre method (88 cents/km for FY2025–26, up to 5,000km) or the logbook method (actual costs based on work-use percentage). Commuting from home to your regular workplace is not deductible.
Working From Home
The revised fixed rate method allows 67 cents per hour worked from home, covering electricity, internet, phone, and stationery. You must keep a record of actual hours worked from home — a timesheet, calendar, or work system log. The actual cost method is also available for those with higher expenses.
Uniforms & Protective Clothing
You can claim the cost of buying, repairing, and cleaning occupation-specific clothing, protective gear, and registered uniforms. Conventional clothing (even if required by your employer) is not deductible. Laundry claims up to $150 do not require receipts.
Self-Education
Courses, conferences, textbooks, and professional development costs are deductible if they directly relate to your current job and maintain or improve your skills. Study for a new career is not deductible. A $250 reduction applies to some self-education expenses.
Tools & Equipment
Items costing $300 or less can be claimed in full immediately. Items over $300 must be depreciated over their effective life. If an item is used partly for work and partly privately, only the work-related portion is deductible.
Phone & Internet
Only the work-related portion of your phone and internet bills is deductible. You need to work out the percentage using a 4-week representative diary. If your total claim for phone and internet is under $50, a reasonable estimate without a full diary is acceptable.
The $300 Receipt Rule
You can claim up to $300 in total work-related expenses without receipts — but you must still be able to show the costs were genuinely incurred. Once your total work-related claims exceed $300, every dollar needs written evidence. Note: this is a $300 total basket, not $300 per item. Keep receipts for everything to be safe.
Lodging Your Tax Return
Most Australians are required to lodge a tax return each year. The ATO pre-fills much of your return with information from your employer, bank, and other sources — but you are responsible for checking it and adding any missing income or deductions.
Key Dates
The tax year ends 30 June. The lodgement deadline for individuals lodging their own return is 31 October. If you use a registered tax agent, you may have until 15 May the following year. Late lodgement can attract a failure-to-lodge penalty.
How to Lodge
Most Australians lodge online through myTax, accessed via myGov. The ATO app also allows lodgement for simple returns. Alternatively, a registered tax agent can lodge on your behalf — their fee is also tax-deductible.
What You'll Need
Your Tax File Number (TFN), payment summaries or income statements from employers, bank interest statements, private health insurance statement, receipts for deductions, and details of any other income (rental, investments, business).
When to Expect Your Refund
If you're owed a refund, the ATO typically processes it within 2 weeks of lodgement for online returns. Refunds are paid directly to your nominated bank account. Complex returns or those selected for review may take longer.
Common Tax Mistakes to Avoid
The ATO uses sophisticated data-matching technology to cross-check returns against employer records, bank data, and third-party information. These are the most common mistakes that trigger reviews or audits:
Claiming the tax-free threshold with multiple employers
You can only claim the tax-free threshold with one employer at a time — your main job. Claiming it with a second employer means not enough tax is withheld, leading to a tax bill at lodgement time.
Forgetting to declare all income
All income must be declared — including bank interest, dividends, rental income, freelance work, and income from the sharing economy (Airbnb, Uber, Airtasker). The ATO receives data from banks, share registries, and platforms directly.
Claiming private expenses as work-related
Only the work-related portion of an expense is deductible. Claiming 100% of a phone bill when you use it 60% personally, or claiming a holiday as a work trip, are common errors the ATO looks for.
Not keeping records
The ATO can audit your return for up to five years. Without receipts, invoices, or logbooks, you cannot substantiate your claims. The ATO myDeductions app makes it easy to photograph receipts on the spot.
Missing the lodgement deadline
Failing to lodge by 31 October (or your tax agent's extended deadline) can result in a failure-to-lodge penalty of $313 per 28-day period, up to a maximum of $1,565. Even if you can't pay, lodge on time to avoid the penalty.
Ignoring HELP debt repayments
If you have a HELP debt and don't tick the box on your TFN declaration, your employer won't withhold the extra repayment amount. This results in a larger-than-expected tax bill when you lodge.
Year-End Tax Planning Tips
The period from April to June is the best time to review your tax position and take action before 30 June. Here are the most effective strategies for Australian individuals:
Top Up Your Super
If you haven't reached the $30,000 concessional cap, consider making a personal deductible contribution before 30 June. You'll get a tax deduction at your marginal rate, and the contribution is taxed at only 15% inside super.
Make Charitable Donations
Donations of $2 or more to registered Deductible Gift Recipients (DGRs) are tax-deductible. If you're planning to donate, doing it before 30 June means you can claim the deduction in the current year's return.
Prepay Work Expenses
If you have upcoming work-related expenses (subscriptions, professional memberships, training courses), paying them before 30 June brings the deduction into the current year rather than next year.
Harvest Capital Losses
If you hold investments sitting at a loss, selling them before 30 June crystallises the capital loss, which can offset capital gains you've made during the year — reducing your CGT liability.
Review Private Health Cover
If you earn over $101,000 and don't have private hospital cover, you're paying the Medicare Levy Surcharge (1%–1.5%). Taking out a basic hospital policy before 30 June can save you more than the premium costs.
Organise Your Records
Use the weeks before 30 June to gather receipts, update your car logbook, and reconcile your home office hours diary. Having everything organised makes lodgement faster and ensures you don't miss any claims.
Important: Tax planning strategies should always be considered in the context of your overall financial situation. What works for one person may not be appropriate for another. We strongly recommend speaking with a registered tax agent or financial adviser before making significant financial decisions based on tax considerations.
Important Disclaimer
The information in this guide is general in nature and for educational purposes only. It does not constitute tax advice and does not take into account your individual circumstances. Tax laws change regularly — always verify current rates and rules at ato.gov.au.
We strongly recommend consulting a registered tax agent or accountant for advice tailored to your personal situation. You can also contact the ATO directly at ato.gov.au or by calling 13 28 61.
This guide is not affiliated with or endorsed by the Australian Taxation Office.