Income tax
Tax rates for residents
The resident tax rates are the progressive income tax rates, set by legislation, that apply to the taxable income of Australian residents for tax purposes, starting with a tax-free threshold.
Australian residents for tax purposes pay income tax using a progressive rate structure. This means that as taxable income rises, higher rates apply to the slices of income above each threshold. The first slice of income is not taxed because of the tax-free threshold, and the next slices are taxed at progressively higher rates up to a top rate.
The thresholds and the percentage rates are set by legislation and are reviewed from time to time. They can change from one year to the next, sometimes with a start date mid-way through a financial year. For that reason this entry does not quote any specific brackets. The ATO publishes the current resident tax rates on its website, and they are also built into the ATO's tax calculators.
Importantly, the rates apply to slices of income, not the whole. If your income crosses into a higher bracket, only the dollars above that threshold are taxed at the higher rate. Moving into a higher bracket never reduces your after-tax income below what it was before, even though your average tax rate rises as income grows.
The rates apply to individuals who are residents. Foreign residents are taxed on a different scale, which has no tax-free threshold, and working holiday makers have their own arrangements. Companies pay a flat rate that depends on whether they are a base rate entity, and trusts are taxed according to how they are structured and who receives distributions.
The resident rates on their own are not the full picture. The Medicare levy, generally 2% of taxable income, is added for most residents, subject to low income reductions and exemptions. Some taxpayers also pay the Medicare levy surcharge. Tax offsets and PAYG credits are then subtracted from the tax calculated. Your final result is the net of all these items.
GST is separate from income tax rates, being a flat 10% on most goods and services. A business owner's income is taxed at personal rates if a sole trader, but the GST collected is not part of that income. Always use the rates for the correct income year, and confirm them with the ATO or a registered tax professional, as this entry is general information only.
Worked example
Suppose, for illustration only, an income scale had a nil rate on the first $10,000, 20% on the next $40,000 and 30% on income above $50,000. On taxable income of $70,000, tax would be 0 + $40,000 x 20% + $20,000 x 30% = $8,000 + $6,000 = $14,000. These rates are invented and not the real scale. Check the ATO website for current resident rates.
Practical tips
- Look up the rates for the correct income year on the ATO website, because they change and may start part-way through a year.
- Remember only income above each threshold is taxed at the higher rate, not all of your income.
- Add the Medicare levy and any surcharge when estimating your total bill, since it is not part of the basic scale.