Income Tax
Tax levied by the federal government on your taxable income, calculated using progressive tax brackets.
Income tax is a federal tax levied on the taxable income of individuals, companies, and other entities in Australia. For individuals, it is calculated using a progressive rate structure where higher portions of income are taxed at higher rates. For the 2026-27 financial year (the current tax year), the individual tax brackets are: 0% on income up to $18,200 (tax-free threshold), 15% on $18,201–$45,000, 30% on $45,001–$135,000, 37% on $135,001–$190,000, and 45% on income over $190,000.
Your income tax liability is reduced by any applicable tax offsets (such as LITO or SAPTO) and increased by the Medicare levy (2% of taxable income for most taxpayers). The difference between tax withheld by your employer during the year (PAYG withholding) and your final tax liability determines whether you receive a refund or owe additional tax.
Australia's income tax system is progressive, meaning you only pay the higher rate on income above each threshold — not on your entire income. This is a common misconception. For example, if you earn $50,000, you pay 0% on the first $18,200, 15% on the next $26,800, and 30% on the remaining $5,000.
How it works
Income tax is levied by the federal government on your taxable income using a progressive rate structure, where each successive slice of income is taxed at a higher rate than the last. For the 2026-27 financial year, individuals pay 0% on income up to $18,200, 15% on the slice from $18,201 to $45,000, 30% from $45,001 to $135,000, 37% from $135,001 to $190,000, and 45% on anything above $190,000. Because it's progressive, only the portion of income sitting within each bracket is taxed at that bracket's rate — not your whole income.
You meet income tax most directly through PAYG withholding on your payslip, where your employer deducts an estimate of your annual liability from every pay based on the ATO's withholding tables. At year-end, your actual liability is recalculated against your full taxable income, offsets like LITO, and the Medicare levy of 2% of taxable income for most taxpayers, with the difference between what was withheld and what's actually owed settled as a refund or a bill on your Notice of Assessment.
The most common misconception is thinking that moving into a higher bracket means all of your income gets taxed at that higher rate — it doesn't; only the slice above the bracket threshold does. Income tax also interacts closely with tax offsets, which cut the tax bill directly, and deductions, which reduce taxable income before the brackets are even applied, so two people with the same salary can end up with quite different final tax bills depending on what offsets and deductions each can claim.
Example: income tax on a $60,000 salary
On a taxable income of $60,000 in 2026-27, the first $18,200 is tax-free. The next slice, from $18,201 to $45,000 ($26,800), is taxed at 15%, giving $4,020. The remaining $15,000, from $45,001 to $60,000, falls into the 30% bracket, giving $4,500.
Adding those two slices together gives income tax of $8,520 ($4,020 plus $4,500). On top of that, the Medicare levy of 2% applies to the full $60,000, adding $1,200, for a total tax bill of $9,720 — an overall rate of about 16.2% on the full $60,000, well below the 30% marginal rate that applied to the last dollar earned.
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Tax Brackets
The income ranges that determine the rate of tax applied to each portion of your taxable income.
Marginal Tax Rate
The rate of tax applied to each additional dollar of income — determined by the tax bracket your top dollar falls into.
Taxable Income
Your assessable income minus allowable deductions — the figure used to calculate your income tax.
Tax-Free Threshold
The first $18,200 of annual income that is not subject to income tax for Australian residents.
Effective Tax Rate
Your total tax as a percentage of your total income — the actual overall rate you pay after all brackets, offsets, and levies.