Income tax

Know how much tax you will pay

If you earn money from work or investments, you will usually pay tax on that money. Understanding how your tax is calculated will help you work out how much tax you should pay.

How much tax will you pay?

Income tax is money paid to the government from the money you earn. It is usually paid throughout the year as you earn the income. For example, if you work for an employer, your employer will deduct tax from each pay and send it to the Australian Taxation Office (ATO) on your behalf.

Your marginal tax rate

The amount of tax you pay will depend on how much you earn. Australia uses a sliding scale of tax. The highest rate of tax you will pay is known as your marginal tax rate.

Marginal tax rates for 2018-19

Taxable income Tax on this income
$0 - $18,200 Nil
$18,201 - $37,000 19c for every dollar over $18,200
$37,001 - $90,000 $3,572 + 32.5c for every dollar over $37,000
$90,001 - $180,000 $20,797 + 37c for every dollar over $90,000
$180,001 and over $54,097 + 45c for every dollar over $180,000

This means that if you earned $60,000 per year, your tax would be calculated like this:

Taxable income   Tax payable
$18,200 x nil  = $0
$18,800 ($37,000 - $18,200) x 19c  = $3,572
$23,000 ($60,000 - $37,000) x 32.5c  = $7,475
$60,000   $11,047

The tables above only apply to Australian residents who are 18 and over and does not include the Medicare levy. Foreign residents and the investment income of children are taxed at different rates. See the ATO's web pages on income of minors and foreign employment income.

Work out how much tax you will pay this year and what your marginal tax rate is.

Income tax calculator

Medicare levy and the surcharge

In addition to income tax, most people will also have to pay a Medicare levy. The Medicare levy is calculated as 2% of your taxable income. It is used to help fund our public health system. Generally, it allows you to visit a doctor or receive treatment at a public hospital free of charge.

Low income earners may have their Medicare levy reduced or may not have to pay it at all. People not entitled to use our Medicare system, such as foreign residents, will not have to pay the Medicare levy either.

High income earning individuals or families who do not have an appropriate level of private patient hospital cover may have to pay a Medicare levy surcharge. This is an extra 1%, 1.25% or 1.5% of their taxable income depending on their income level.

The Medicare levy is charged as part of your yearly income tax assessment. The ATO website has more information on the Medicare levy.

What income is taxable?

Your taxable income is your assessable income minus your tax deductions.

Income that is taxable

Income that you must pay tax on includes money from:

  • employment
  • pensions and annuities
  • most government payments
  • investments
  • capital gains
  • income from trusts, partnerships or businesses
  • foreign income.

The ATO has more information on income you must declare in your tax return.

Income that is not taxable

You will not have to pay tax on:

  • lottery winnings and other prizes
  • small gifts or birthday presents
  • some government payments
  • child support
  • the tax-free portion of your redundancy payment
  • government super co-contributions.

The ATO has more details on amounts not included as income.

How Australians spend their tax refund

Spend tax refund 2018 thumbnailTake a look at our tax refund infographic to find out the average refund and how people spend it.

Reducing your tax payable

You may be able to reduce the amount of tax you pay if you are entitled to any tax deductions or tax offsets (rebates) or if you decide to salary sacrifice.

Tax deductions

Tax deductions are certain expenses you incurred in order to earn your income. Deductions reduce your taxable income before the tax is calculated.

Common deductions include:

  • Work-related expenses
  • Self-education expenses
  • Charitable donations
  • The cost of managing your tax affairs (like paying an accountant).

You can find out more about deductions on the ATO's income and deductions webpage.

Tax offsets

Tax offsets directly reduce the amount of tax owing, and are applied after the tax has been calculated.
Common tax offsets include offsets for:

  • low and middle income earners
  • taxpayers with a dependent relative
  • pensioners and senior Australians
  • the taxable portion of a superannuation income stream.

You can find out more about tax offsets on the ATO's offsets and rebates webpage.

Salary sacrificing

Salary sacrificing is another way you can reduce your tax bill. Salary sacrificing, also known as salary packaging, is when you put some of your pre-tax income towards a particular benefit before you are taxed. Common salary sacrifice benefits include superannuation and motor vehicles. 

For more details, see our webpage on salary packaging.

Getting a tax bill

You may not have prepaid enough tax to cover your yearly tax assessment  if:

  • you've received income where no tax was withheld
  • you're a sole trader and haven't paid enough tax to the ATO throughout the year, or
  • your employer hasn't withheld enough tax from your assessable income.

This means that you will get a tax bill, rather than a refund, after you lodge your tax return.

Common reasons you may not have prepaid enough tax during the year, include:

  • You moved into a higher tax bracket because your assessable income increased (e.g. through a promotion or another source of income) 
  • You earned income as a sole trader
  • You received income from investments (e.g. rental income, interest or dividends) or through the sharing economy (e.g. Uber, Air BnB)
  • Your study or training support loan repayments increased because your assessable income went up
  • Your Medicare levy or Medicare levy surcharge payable changed or there was a change in your private health insurance rebate
  • The amount of tax offsets or rebates you're entitled to changed because your income increased
  • You made a capital gain during the income year, or
  • You received income from a business, partnership or trust.

How to avoid getting a tax bill

If you've earned income where no (or not enough) tax has been withheld, you can take steps to reduce the likelihood of receiving a tax bill. For example you could:

  • voluntarily make PAYG instalments - If you earn income as a sole trader or from investments, you can choose to make voluntary PAYG instalments.
  • prepay tax - You can make tax prepayments any time to make it easier to manage your tax. Prepaid amounts are held by the ATO towards your expected bill, unless you or your agent request a refund.
  • increase employer tax withheld - You can ask your employer to increase the amount of tax withheld from your pay. This is known as an upward variation.
  • consider the impact of a capital gain - If you sell a capital asset for more than what you paid for it you will have made a capital gain. Consider the impact the amount and timing of the gain will have on your assessable income.

If you're not sure how much tax to set aside, our income tax calculator will estimate how much tax you are likely to owe so you can plan how much money to set aside or prepay.

Where to go for help with your tax

Tax is a very complex area and many people use an accountant or tax agent to help manage their income tax obligations and complete their tax return. Find out more about choosing an accountant.

If you do your own tax return make sure you are getting all the deductions and offsets you are entitled to. You can use the ATO's income tax calculator to give you an idea of what to expect before you lodge.

Understanding how your income is taxed will help you to make better decisions about your money.

Related links

Last updated: 27 Aug 2018