How Income Tax Works in Australia

Progressive Taxation

Australia uses a progressive income tax system. This means you pay different tax rates on different portions of your income depending on the tax brackets you fall into.

For example, the first $18,200 of income is tax-free for Australian residents who claim the tax-free threshold. Income above this amount is taxed at increasing marginal tax rates depending on your total taxable income.

You can see the full breakdown in our Tax Brackets Guide.

Medicare Levy

Most Australian residents pay the Medicare Levy, which is typically 2% of taxable income. The Medicare Levy helps fund Australia's public healthcare system.

Low-income earners may qualify for a reduced Medicare Levy or full exemption depending on their income and family situation. Non-residents and working holiday makers generally do not pay the Medicare Levy.

The Medicare Levy is calculated in addition to income tax and increases the total amount of tax you pay.

Medicare Levy Surcharge (MLS)

The Medicare Levy Surcharge (MLS) is an additional tax for higher-income earners who do not have eligible private hospital cover.

For the 2025–26 financial year, individuals earning above $101,000 and families earning above $202,000 may need to pay the MLS. The surcharge ranges from 1% to 1.5% of your income depending on your income level.

Unlike income tax, the MLS is applied to your entire income rather than only the portion above a threshold.

Calculate your exact MLS obligation →

HECS/HELP Repayments

If you have a student loan such as HECS-HELP or FEE-HELP, repayments are collected through the tax system once your income exceeds the minimum repayment threshold.

From the 2025–26 financial year, Australia uses a marginal HECS repayment system. This means repayment rates apply only to income above each threshold, rather than applying a single rate to your entire income.

Repayments are calculated based on your repayment income, which may include additional components such as reportable fringe benefits or investment losses.

Calculate your full HECS repayment schedule →

Tax Offsets

Tax offsets (sometimes called tax rebates) reduce the amount of income tax you need to pay. Unlike deductions, which reduce taxable income, tax offsets directly reduce your tax bill.

Australia has several tax offsets designed to support lower-income earners and retirees.

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

Superannuation is Australia's retirement savings system. Employers are required to contribute a percentage of your salary into a super fund under the Superannuation Guarantee.

For the 2025–26 financial year, employers must contribute 12% of an employee's ordinary time earnings into superannuation.

Salary sacrifice contributions can reduce your taxable income for income tax purposes, but they do not reduce HECS repayment income or Medicare Levy Surcharge income.

You can calculate your salary sacrifice tax savings to see how pre-tax super contributions affect your take-home pay.

PAYG Withholding

PAYG (Pay As You Go) withholding is the system used by employers to collect income tax during the year.

Each time you are paid, your employer withholds a portion of your salary and sends it directly to the Australian Taxation Office (ATO).

When you lodge your tax return, the ATO compares how much tax was withheld with your actual tax liability. If too much tax was withheld, you receive a tax refund. If too little was withheld, you may need to pay additional tax.