Income tax is a part of life for anyone earning money in Australia. If you're new to the tax system, it can be a bit confusing! Perhaps you’ve just started your first job after school, finished university and landed your first full-time role, or recently moved to Australia. Whatever your situation, this guide is here to make things simple and help you understand the basics of Australia’s income tax system.

What is Income Tax?

Income tax is money that individuals and businesses pay to the government based on their earnings. It helps fund public services that we all rely on, from Medicare to schools and roads. In Australia, the Australian Taxation Office (ATO) oversees the collection and management of income tax.

Think of income tax as chipping in for the services we all use. For instance, when you drive on a well-paved road or visit a public hospital, part of the funding for those services comes from income tax.

Who Needs to Pay Income Tax?

Residents vs. Non-Residents

In Australia, residents for tax purposes pay tax on their worldwide income, while non-residents only pay tax on income earned from Australian Sources. Determining your residency status for tax purposes is crucial, as it impacts your obligations. Even if you’re on a visa, you might still be considered a resident for tax purposes. The rest of this article will only consider Income tax for residents, and we suggest you seek specialist accounting advise on this matter as it is complex.

Income Thresholds

You don’t need to pay tax if your income is below $18,200. This is called the tax-free threshold. Once you earn above that, you’ll start paying tax on the amount over $18,200. For example, if you earn $20,000, only $1,800 will be taxed.

Examples of Taxable Income

Taxable income includes more than just your salary. It also covers things like:

• Rent from investment properties
• Interest from bank accounts
• Profits from a small business
• Gains made on the sale of investments including crypto currency
• Payments from Centrelink
• Distributions from trusts
• Foreign sourced Income

For more information please visit the ATO website.

Income that are not taxable:

There is income that you don't need to include as assessable income in your tax return. But, you may still need to report these amounts, so that ATO can work out your tax losses or eligibility for tax offsets or benefits.

Those income fall into 3 categories:

• exempt income
• non-assessable, non-exempt income
• other non-taxable amounts.

For more information please visit the ATO website.

How is Income Tax Calculated?

Australia uses a progressive tax system, which means the more you earn, the higher your tax rate. Let’s break it down:

Current resident tax rate brackets in Australia 2024-25

For example, if Mia earns $50,000 a year, she pays $4,288 plus 30% on the portion over $45,000, which is $5,000. Her tax on income is $5,788.

Medicare Levy and Surcharge

On top of your income tax, there’s a Medicare Levy of 2% to help fund Australia’s public healthcare system. Some people with lower incomes may qualify for a reduction or exemption.

For more information please visit the ATO website.

You may also have to pay a Medicare levy surcharge (MLS) of between 1.0% and 1.5% of your taxable income if:

• you, your spouse and your dependent children do not have an appropriate level of private patient hospital cover
• you earn above a certain income.

The MLS is an amount you pay on top of the Medicare levy.

For more information please visit the ATO website.

Reducing tax on income

You may be eligible to reduce the amount of tax you pay on income if:

• you are entitled to tax deductions or offsets
• you choose to salary package (salary sacrifice)

Tax Deductions: Tax deductions can help to reduce your taxable income. Common tax deductions include work-related expenses, tax-deductible donations, cost of managing your tax affairs. More details are available on the ATO website.

Tax Offsets: Tax offsets or rebates are applied after tax on income is calculated to reduce the amount of tax payable. Common tax offsets include Low Income Tax Offset, Seniors and Pensioners Tax Offset. For more information please visit the ATO website.

Salary Sacrifice: This is when you and your employer agree for you to receive less income before tax in exchange for certain benefits of similar value for you and it can reduces your taxable income. More details are available on ATO website.

Types of Taxable Income

Employment Income

This includes salaries, wages, allowances, bonuses, and even tips. For instance, if you receive a Christmas bonus from your employer, it’s taxable.

Government Payments

Payments like JobSeeker, Youth Allowance, or the Age Pension are also considered taxable income. However, some specific government payments may be tax-exempt.

Investment Income

Earnings from bank interest, dividends, or rental properties fall under this category. If you sell your shares or receive income from your foreign investments this can fall under this category as well.

Business Income

Running your own business? Your profits count as taxable income.

How do I pay income tax?

Income tax is usually withheld from your pay by your employer. This system is called Pay As You Go (PAYG). At the end of the financial year, you’ll need to lodge a tax return to reconcile what you’ve paid with what you owe. If you’re self-employed or earn additional income, you may need to pay tax directly to the ATO.

When do I need to do my tax return?

The Australian financial year runs from July 1 to June 30. You can start lodging your tax return from July 1, and the deadline for most people is October 31. If you’re using a tax agent, they may be able to get an extension.

What Documents Do You Need?

Staying organised can save you a lot of stress. Keep track of:

• Bank statements
• Receipts for work-related expenses
• Records of any income earned

Penalties for non-compliance

Failing to lodge your tax return on time can lead to penalties. The ATO may charge interest on unpaid taxes or issue fines. It’s also essential to report your income accurately to avoid audits.

Resources and Support

The ATO offers tools to help such as myTax for lodging returns online. If you would like to be strategic about minimising your tax, consider hiring a tax agent for professional advice and tax planning. It can save you a large amount of time, money and stress knowing you’ve got support with your taxes.

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