How Australian income tax works

If you earn income in Australia, you generally pay income tax on it. That includes salary and wages, but also business income, most investment income (interest, dividends, rent), and capital gains when you sell an asset. What you’re taxed on is your taxable income: your total assessable income minus any deductions you’re entitled to claim.

The rates you pay depend on your tax residency, which is not the same as your visa or citizenship. Most people who live and work in Australia are residents for tax purposes and get the rates below. Foreign residents and working holiday makers (subclass 417 and 462 visas) are taxed differently — we cover those near the end.

The first $18,200 a resident earns each year is completely tax-free. You only start paying income tax on the dollar after that. This is why a part-time or casual worker earning under $18,200 in a year typically pays no income tax at all (though they may still have had tax withheld and get it back at tax time).

When you start a job you claim this threshold on your Tax file number declaration. A common trap: if you hold two jobs at once and claim the threshold on both, not enough tax is withheld overall and you can end up with a bill at tax time. The usual advice is to claim it only on your main (highest-paying) job.

Australia taxes income in slices. Each slice of your income falls into a bracket, and only that slice is taxed at the bracket’s rate. Moving into a higher bracket never increases the tax on the income you already earned below it. Here are the resident rates for 2026-27:

The lowest rate dropped to 15% on 1 July 2026 (down from 16%), the first of two legislated cuts — it’s scheduled to fall again to 14% on 1 July 2027. These rates sit on top of the Medicare levy, covered below. See the full breakdown on our tax brackets page.

The key takeaway: being “in the 30% bracket” does not mean you pay 30% of your salary. It means thelast dollar you earned is taxed at 30%. Your overall, or effective, rate is always lower.

Say you’re a resident earning $90,000. Your income tax is built up slice by slice:

• First $18,200 → taxed at 0% → $0
• $18,201–$45,000 ($26,800) → at 15% → $4,020
• $45,001–$90,000 ($45,000) → at 30% → $13,500

That’s $17,520 of income tax. Add the 2% Medicare levy ($1,800) and your total is $19,320, leaving a take-home of $70,680. So on $90,000 your effective tax rate is about 21.5%, even though your marginal rate is 30%. Every extra dollar you earn from here is taxed at 30% plus 2% Medicare — so a $1,000 pay rise adds about $680 to your pocket, not $1,000.

An offset reduces the tax you owe, dollar for dollar (unlike a deduction, which reduces your taxable income). The Low Income Tax Offset gives residents up to $700 if their taxable income is $37,500 or less. Above that it phases out gradually and reaches nil at $66,667, so it’s a benefit aimed squarely at lower earners.

You don’t claim LITO anywhere — the ATO applies it automatically when your return is assessed. It can reduce your tax to zero but it can’t create a refund on its own beyond the tax you’ve paid.

On top of income tax, most residents pay a 2% Medicare levy to help fund the public health system. It applies to your whole taxable income once you earn above the low-income threshold (around $28,000, with a shade-in zone just above it where the levy is reduced). Foreign residents and most working holiday makers don’t pay it.

There’s also a separate Medicare Levy Surcharge (MLS) of 1% to 1.5% that applies to higher earners who don’t hold an appropriate level of private hospital cover. For singles it starts above about $105,000. It’s designed to nudge higher earners onto private cover, and for many people at that income the surcharge costs more than a basic hospital policy would — which is worth checking. Our calculator lets you toggle private cover on and off to see the difference.

On top of your salary, your employer must pay the superannuation guarantee — 12% of your ordinary earnings from 1 July 2025 — into your super fund. This is genuinely on top: it doesn’t come out of your take-home pay. But it’s also not money you can spend now; it’s locked away for retirement and taxed at a concessional 15% inside the fund.

This matters when you compare job offers. A role quoting “$100,000 plus super” is worth more than one quoting “$100,000 including super”. Always check whether a figure is the base salary or the total package.

If you have a HECS-HELP or other study loan, you make compulsory repayments through the tax system once your income passes a threshold — $69,528 for 2026-27. Since 1 July 2025 these repayments are marginal: you only repay a percentage of the income above the threshold, not your whole income, which fixed a long-standing quirk where one extra dollar could cost hundreds. We cover this in full, with its own calculator, on the HECS-HELP repayment page.

Foreign residents don’t get the tax-free threshold and pay 30% from the very first dollar (up to $135,000), and they don’t pay the Medicare levy. Working holiday makers on 417 and 462 visas have their own schedule: 15% on the first $45,000, then the resident rates above that. If you’re on a working holiday, our working holiday maker tax page has the detail. You can switch residency type in the calculator to compare.

For employees, tax isn’t something you pay in one lump — your employer withholds an estimate from each pay under the PAYG withholding system and sends it to the ATO on your behalf. After 30 June you lodge a tax return that reconciles what was withheld against what you actually owe. If too much was withheld, you get a refund; if too little, you get a bill. Claiming legitimate work-related deductions (and offsets like LITO) is what often turns that into a refund.