The Basics: How Australian Tax Brackets and Rates Work

Australia uses a tiered approach to tax, with different rates applying to different portions of your income. Each year, the government may update these rates. For the 2024-25 income year, the tax brackets and rates for Australian residents have changed, thanks to recent tax cuts that aim to reduce the tax burden for most taxpayers.

What Is Taxable Income?

Your taxable income is the amount left after subtracting allowable deductions from your total assessable income. Assessable income includes your wages, investment income (like interest and dividends), rental income, capital gains, and any other income generally subject to tax. Allowable deductions might include work-related expenses, donations, and some types of investment costs.

As a business owner, staying on top of your finances means more than just keeping your books in order—it’s also about making sure you claim every tax deduction you’re entitled to. That’s why we recommend checking out the comprehensive Tax Deduction Checklist from ACT Tax Group. This free resource is designed for both individuals and businesses, covering everything from work-related expenses to business-specific deductions.

Understanding the Tax Free Threshold

The tax free threshold is the amount of income you can earn before you need to pay any income tax. For most resident taxpayers, this threshold is $18,200. If your taxable income is below this amount, you won’t pay tax. Once your income goes above the threshold, you start paying tax at the rates set out in the following table.

The Latest Resident Tax Rates

Here are the current tax rates for Australian residents for the 2024-25 tax year:

These changes, which took effect from 1 July 2024, mean that most residents will see a reduction in the tax they pay compared to previous years. The above rates apply only to Australian residents; non residents and temporary residents are taxed differently, and special rules apply to certain income types.

Step-By-Step Guide to Calculating Your Income Tax

Calculating your income tax involves a few clear steps. By following this process, you’ll know exactly how much tax you need to pay and where you might be able to save.

Step 1: Work Out Your Assessable Income

Start by adding up all your income for the financial year. This includes:

• Wages and salaries

• Investment income (interest, dividends, and rental income)

• Capital gains from selling assets

• Lump sum payments

• Other income, such as foreign income or certain payments

If you receive dividends, remember to include any franking credits, as these are counted for tax purposes.

Step 2: Subtract Allowable Deductions

Next, subtract any allowable deductions. These might include:

• Work-related expenses (like uniforms, tools, or travel costs)

• Donations to registered charities

• Tax agent fees

• Investment expenses

• Some self-education costs

After subtracting these deductions from your assessable income, you’ll have your taxable income.

Step 3: Apply the Tax Rates

Now, use the tax brackets to work out your income tax payable. Remember, each part of your income is taxed at the rate for that bracket. Only the amount above each threshold is taxed at the higher rate.

For example, if your taxable income is $70,000:

• The first $18,200 is tax free.

• The next $26,799 ($45,000 – $18,201) is taxed at 16%.

• The remaining $25,000 ($70,000 – $45,000) is taxed at 30%.

Add these amounts together to get your total tax before offsets and levies.

Step 4: Consider Tax Offsets

Tax offsets can directly reduce the amount of tax you need to pay. The most common is the Low Income Tax Offset, which is available to those with taxable incomes below $66,667. The offset starts at $700 and reduces as your income increases above $37,500.

Other tax offsets may apply if you meet certain conditions, such as being a senior or pensioner, or if you receive certain lump sum payments.

Step 5: Add the Medicare Levy

Most Australian residents pay the Medicare Levy, which is 2% of your taxable income. This helps fund the public health system. If your income is below a certain threshold ($26,000 for singles), you may not have to pay the levy, or you may pay a reduced amount. Special rules apply for families and seniors.

Step 6: Check for the Medicare Levy Surcharge

If you earn a high income and don’t have private hospital insurance, you might be charged an extra tax called the Medicare Levy Surcharge. This surcharge applies to high income resident taxpayers with incomes above $93,000 for singles or $186,000 for families. The surcharge can be up to 1.5% of your taxable income, depending on your income level.

Having private health insurance can help you avoid this extra cost.

Real-Life Examples: Calculating Income Tax for Different Incomes

Let’s look at how these steps work in practice for different Australian residents.

Example 1: Middle Income Earner

Alex earns $65,000 in wages and has $3,000 in allowable deductions. His taxable income is $62,000.

• Tax on first $18,200: $0 (tax free threshold)

• Tax on next $26,799: $4,288 (16%)

• Tax on next $17,000: $5,100 (30%)

• Total tax before offsets: $9,388

Alex is eligible for a partial Low Income Tax Offset, which reduces his tax. He also pays the Medicare Levy of $1,240 (2% of $62,000). If Alex does not have private health insurance and his income is below the surcharge threshold, he won’t pay the Medicare Levy Surcharge.

Example 2: High Income Earner

Priya earns $150,000, with $8,000 in deductions, so her taxable income is $142,000.

• Tax on first $18,200: $0

• Tax on next $26,799: $4,288

• Tax on next $90,000: $27,000

• Tax on next $7,000: $2,590 (37%)

• Total tax before offsets: $33,878

Priya is not eligible for the Low Income Tax Offset. She pays the Medicare Levy of $2,840. If Priya doesn’t have adequate private health insurance, she will also pay the Medicare Levy Surcharge, as her income is above the threshold for high income resident taxpayers.

Example 3: Low Income Earner

Sam earns $35,000 and has no deductions.

• Tax on first $18,200: $0

• Tax on next $16,799: $2,688 (16%)

• Total tax before offsets: $2,688

Sam receives the full Low Income Tax Offset of $700, reducing his tax to $1,988. His income is below the Medicare Levy threshold, so he does not pay the levy.

Special Considerations for Certain Income Types

Some types of income and payments are taxed differently, or have special rules.

Capital Gains

If you sell an asset like shares or property, any capital gains are included in your assessable income. If you’ve held the asset for more than 12 months, you may be able to reduce the gain by 50% for tax purposes.

Lump Sum Payments

Certain lump sum payments, such as redundancy or unused leave, are taxed at special rates. These payments are still generally subject to tax, but the rate may be lower than your marginal tax rate.

Investment Income

Interest, dividends, and rental income are all assessable income. If you receive dividends with franking credits, these credits can reduce your tax payable. Investment expenses, such as interest on loans for investment properties, can be claimed as deductions.

Foreign Income

If you are an Australian resident for tax, you must report all your income, even money earned in other countries. If you have already paid tax on any of this income overseas, you might be able to get a tax offset here. Special rules could apply depending on your situation.