A Beginners Guide to Income Tax
Australian residents are subject to income tax from their domestic and foreign income.
There may be exceptions for temporary residents and temporary residents who earn foreign income. Non-residents are liable for Australian income tax on their assessable income derived from Australian sources.
Understanding Income Tax
When an individual earns money, they have to pay income tax on their taxable income. Included in your taxable income are wages, pension income, government payments, investment dividends, and foreign income. The amount you pay will depend on how much you have earned as well as the offsets or deductions you are eligible to claim.
For employees, it’s up to the employer to deduct taxes from their wages, which are then automatically sent to the Australian Tax Office (ATO) on the employees’ behalf. Self-employed people need to set aside their withholdings and pay them to the ATO themselves.
At the end of the financial year, people file a tax return with the ATO. There are online services that allow you to do this simply. But some people with higher income- might need an accountant to assist.
How To Calculate Income Tax
Australia’s income year runs from 1 July to 30 June, and the Australian income system uses a progressive tax scale, which means that the rate of tax payable increases as the taxable income increases. The rates below do not include the 2% Medicare levy.
| Income | Income Tax | Marginal Tax Rate |
| Up to $18,200 | 0 | |
| Income between $18,201 and $45,000 | 19 cents for every dollar over the initial $18,200 | 19% |
| Income between $45,001 and $120,000 | $5,092 and 32.5 cents for every dollar over $45,000 | 32.5% |
| Income between $120,001 and $180,000 | $29,467 and 37 cents for every dollar over $120,000 | 37% |
| Income over $180,001 | $51,667 and 45 cents for every dollar over $180,000 | 45% |
So, if your annual income during the financial year is $80,000, your income tax would be:
| Taxable Income | Tax Rate | Tax Payable |
| $18,200 | Nil | $0 |
| $45,000 | 19 cents | $5,092 |
| $45,001 – $80,000 | 32.5 cents | $11,375 |
| Pre-medicare levy total | $16,467 | |
| Final total | $18,067 including 2 percent Medicare |
Foreign residents are subject to a tax rate of 32.5 cents per dollar up to $120,000. For earnings over $120,000 and under $180,001, it is 37 cents per dollar. And 45 cents per dollar for any earnings over $180,000.
Foreign resident income tax rates
| Income Threshold | Tax Rates Apply |
| Up to $120,000 | 32.5 cents for every dollar. |
| Between $120,001 and $180,000 | $39,000. Plus 37 cents for every dollar over $120,000. |
| Over $180,001 | $61,200. Plus 45 cents for every dollar over $180,000. |
Holidaymakers who work are also subject to special income tax rates. The first AUD $45,000 is taxed at a rate of 15%, and anything over is taxed at the ordinary rate. For earnings between $45,001 and $120,000, working holiday makers must pay 32.5 cents for every dollar. The rate rises to 37 cents per dollar for earnings between $120,001 and $180,000. It rises again to 45 cents per dollar for earnings over $180,001.
Find out more about the relevant income tax rates for foreign residents, holiday-making workers, and people under 18 at the ATO’s Website.
Medicare Levy
The majority of Australians are subject to the Medicare levy, which is equal to 2% of taxable income. You pay this as part of your annual income tax assessment, which basically means that the pay as you go amount that your employer withholds from your salary or wages on every payment, includes an amount to cover the Medicare levy. For low-income Australians, this levy may be reduced.
Please note non-residents do not need to pay the Medicare levy, even if they are paying income taxes, since, in most cases, non-residents are not entitled to Medicare benefits and may be able to get a medicare levy exemption. Visit the ATO’s page on Medicare levy exemptions to see if you qualify for it.
Taxable Income vs. Non-Taxable Income
Taxable income is what you need to pay income tax on, fewer offsets and deductions. You have to pay income tax on employment, pensions or benefits received annuities, some government payments, capital gains, grants, investments, foreign income, and any income that comes from businesses, trusts or partnerships. The ATO provides further details on taxable income on their website.
However, not all income you receive is taxable. This includes lottery winnings, prise winnings, birthday presents, small gifts, some government payments and grants, child support, government super contributions, and the tax-free part of redundancy payments.
Deductions, Income Tax Offsets & Salary Packaging
There are many ways to reduce the tax you pay, in the form of offsets, salary sacrifice, and deductions.
Tax Offsets
Tax offsets or rebates directly reduce the amount of tax payable. Tax offsets and rebates are applied once your income tax has been calculated.
Common tax offsets apply to:
- Pensioners or seniors
- Taxable portions of superannuation income
- Low-income earners
- Middle-income earners
- Taxpayers caring for an invalid relative
Deductions
Deductions take place before income tax is calculated, and you may be able to claim deductions for some of the expenses you may have had in the financial year when you lodge your tax return.
In most cases, the deductions you will be able to make would be work-related expenses, and if you wanted to claim those, there are three things to always consider:
- You must have spent the money yourself and not have been reimbursed by your employer
- The expense must directly relate to your work or the way you earn your income
- You must have a record to prove it (a receipt should work for this)
Some other common deductions include:
- Union fees
- Study expenses as long as they are related to your work activities
- Charitable donations
- The cost of paying an accountant or other professional to manage your tax affairs.
Salary Sacrifice
Salary sacrifice is when you agree on an arrangement to receive less salary (take-home income) from your employer in return for benefits. These benefits would be paid out of your pre-tax salary.
For example, some people receive a lower salary in exchange for car payments or additional superannuation.
Reducing your salary through salary sacrifice drives your taxable income down. However, you cannot claim these services or items as a deduction.
Source: Quickbooks