Income tax

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If you earn money from your work or from 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 Tax 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 2016-17

Taxable income Tax on this income
$0 - $18,200 Nil
$18,201 - $37,000 19c for every dollar over $18,200
$37,001 - $87,000 $3,572 + 32.5c for every dollar over $37,000
$87,001 - $180,000 $17,547 + 37c for every dollar over $87,000
$180,001 and over $54,547 + 47c for every dollar over $180,000 (includes Temporary Budget Repair Levy)

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. The top marginal tax rate does include the budget repair 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.

Use our income tax calculator to find out how much tax you will pay this year and to find out 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 deducted as part of your income tax and forwarded to the tax office on your behalf.
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 refunds thumbnailTake a look at our tax refund infographic to find out the average refund and how people spend it.

Reducing your tax bill

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 paid, and are applied after the tax has been calculated.
Common tax offsets include offsets for:

  • Low 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 is when you put some of your pre-tax income towards a particular benefit before you are taxed. This is usually only tax-effective for medium and high income earners. For more details see our information on salary sacrifice.

Where to go for help on your tax

Tax is a very complex area and many people choose to use an accountant or tax agent to do 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 comprehensive 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.


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Last updated: 14 Nov 2016