How Income Tax Works in Australia
A comprehensive guide to progressive taxation, Medicare, HECS/HELP, tax offsets, superannuation and PAYG.
Progressive Taxation
Australia uses a progressive tax system, meaning you pay different rates on different portions of your income. You don't pay your marginal rate on your entire income — only on the portion above each threshold. The first $18,200 you earn is completely tax-free (for residents claiming the tax-free threshold).
Medicare Levy
Most Australian residents pay a 2% Medicare levy on their taxable income. Low-income earners (below $26,000) are exempt, with a reduced rate for incomes between $26,001 and $32,500. Non-residents and working holiday makers do not pay Medicare levy.
Medicare Levy Surcharge (MLS)
If you're a resident earning above $101,000 (FY 2025-26) and don't have private hospital cover, you'll pay an additional MLS of 1% to 1.5% on your entire taxable income. This is calculated on your full income, not just the amount above the threshold.
Calculate your exact MLS obligation →
HECS/HELP Repayments
If you have a study loan (HECS-HELP, FEE-HELP, etc.), repayments are collected through the tax system once your income exceeds the minimum threshold. From FY 2025-26, Australia switched to a marginal rate system, where you only pay the repayment rate on income above each threshold — similar to how income tax brackets work. This replaced the previous flat rate system where the rate applied to your entire income.
Calculate your full HECS repayment schedule →
Tax Offsets
Low Income Tax Offset (LITO)
LITO provides up to $700 in tax relief for incomes up to $37,500, reducing gradually to zero at $66,667. It's a non-refundable offset — it can reduce your tax to zero but won't generate a refund.
SAPTO
The Senior Australians and Pensioners Tax Offset provides up to $2,230 for eligible seniors (aged 67+) with taxable incomes below $50,119.
Superannuation
Your employer is required to contribute 12% (FY 2025-26) of your ordinary time earnings into a super fund. This is on top of your salary unless your contract specifies salary inclusive of super. Salary sacrifice is additional voluntary pre-tax super contributions that reduce your taxable income.
PAYG Withholding
Your employer withholds tax from each pay and sends it to the ATO on your behalf. When you lodge your tax return, the ATO compares what was withheld with your actual tax liability. If too much was withheld, you get a refund; if too little, you'll have a tax bill.