Most Australians pay income tax every year, yet many still feel unsure about how their final tax bill is calculated. Payslips show tax being deducted, but that does not always reflect what you owe. Deductions, offsets, residency status, and levies can change the outcome, often in ways people do not expect. Without a clear understanding of the process, it is easy to overpay, miss entitlements, or make avoidable errors.
Individual income tax in Australia follows a structured system set by the Australian Taxation Office. Understanding how taxable income is calculated and how rates are applied helps individuals make informed decisions, and this clarity is central to navigating Individual Tax Return Services in Australia with confidence rather than uncertainty.
This guide explains how tax is calculated for the 2025 to 26 financial years, using verified ATO rules and clear examples.
What Individual Income Tax Means in Australia
Individual income tax is the tax you pay on income earned during a financial year, which runs from 1 July to 30 June. You lodge a tax return after the year ends, and the ATO checks whether the correct amount of tax was paid.
Income that is usually taxable includes:
- Salary and wages
- Allowances and bonuses
- Business or freelance income
- Interest, dividends, and rental income
- Capital gains from selling assets such as shares or property
Not every dollar you earn is taxed the same way. Your residency status, deductions, levies, and offsets all shape the result.
Residency Status Comes First
Before any tax calculation begins, your residency status must be clear.
If you are an Australian resident for tax purposes, you are taxed on income from Australia and overseas.
If you are a non-resident, you are taxed only on income sourced in Australia.
Residency is based on ATO tests, not just your visa or citizenship. Many people assume their status and get it wrong, which can lead to incorrect tax rates or penalties.
The Tax-Free Threshold Explained
Australian residents receive a tax-free threshold of AUD 18,200. You pay no tax on income up to this amount.
Non-residents do not receive a tax-free threshold. Tax applies from the first dollar earned.
If you arrive in or leave Australia part way through the year, the threshold may be reduced. The ATO adjusts it based on the number of days you were a resident.
Individual Income Tax Brackets for Residents 2025 to 26
Australia uses a progressive tax system. This means higher rates apply only to higher portions of income, not your entire salary.
Resident tax rates
For the 2025 to 26 financial year, the resident tax brackets are:
| Taxable income | Tax on this income |
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 16c for each $1 over $18,200 |
| $45,001 – $135,000 | $4,288 plus 30c for each $1 over $45,000 |
| $135,001 – $190,000 | $31,288 plus 37c for each $1 over $135,000 |
| $190,001 and over | $51,638 plus 45c for each $1 over $190,000 |
Each portion of your income is taxed at its own rate. This structure prevents lower income earners from being taxed too heavily.
Tax Rates for Non-Residents
Non-residents are taxed at different rates:
| Taxable income | Tax on this income |
| $0 – $135,000 | 30c for each $1 |
| $135,001 – $190,000 | $40,500 plus 37c for each $1 over $135,000 |
| $190,001 and over | $60,850 plus 45c for each $1 over $190,000 |
There is no tax-free threshold. Non-residents also do not pay the Medicare levy. Some income types, such as interest or dividends, may be taxed through withholding rules instead.
Step by Step Individual Income Tax Calculation
Understanding the calculation helps you see where each dollar goes.
Step 1: Work out assessable income
Add all income that is taxable for the year.
Step 2: Subtract allowable deductions
Deductions must relate directly to earning income and must be supported by records.
Taxable income equals assessable income minus deductions.
Step 3: Apply tax brackets
Your taxable income is split across tax brackets and taxed at each marginal rate.
Step 4: Add Medicare levy
Most residents pay an extra 2 percent of taxable income.
Step 5: Apply tax offsets
Offsets reduce the tax you owe, not your taxable income.
Step 6: Compare with tax withheld
The ATO compares your final tax with PAYG amounts already paid.
This process forms the basis of any individual income tax calculation under ATO rules.
A Simple Example You Can Follow
Assume you are an Australian resident earning AUD 60,000 with no deductions.
- First 18,200 is tax free
- Next 26,800 is taxed at 16 percent
- Remaining 15,000 is taxed at 30 percent
Tax on 26,800 equals 4,288
Tax on 15,000 equals 4,500
Total income tax equals 8,788
Medicare levy at 2 percent equals 1,200
Total tax payable equals 9,988, before offsets or PAYG credits.
Medicare Levy and Medicare Levy Surcharge
The Medicare levy is set at 2 percent of taxable income for most residents. It helps fund Australia’s public health system.
Some people pay less or none if their income is below certain thresholds.
A Medicare levy surcharge of 1 to 1.5 percent may apply if you earn above set income limits and do not hold adequate private hospital cover. Non-residents are exempt from both the levy and the surcharge.
Deductions and Offsets That Reduce Tax
Common work-related deductions include:
- Travel for work purposes
- Tools, equipment, and uniforms
- Professional memberships
- Home office expenses
You must be able to prove the expense and show its link to earning income.
Tax offsets work differently. Examples include the Low-Income Tax Offset and the private health insurance offset. Offsets reduce the tax you owe and are subject to eligibility and current thresholds.
Lodging Your Tax Return
Most individuals must lodge tax return online by 31 October if filing themselves. Registered tax agents can often access later lodgement dates.
If you paid more tax than required during the year, you receive a refund. If you paid too little, the ATO issues a bill. Accuracy matters more than speed when lodging.
Support When You Want Tax Confidence
Understanding how individual income tax works gives you clarity and control over your finances. When you know how income, deductions, levies, and offsets come together, tax time becomes less stressful and more predictable. While the rules are structured, every person’s situation is different, and small details can change the outcome. Staying informed helps you avoid errors, meet ATO requirements, and make better decisions throughout the year.
How Aupod Supports You at Every Stage
If you want support that reflects your real situation, Aupod supports individuals at every stage. We work with you to review your tax position, explain your obligations clearly, and ensure your calculations align with current ATO rules. Whether you are filing for the first time or managing more complex income, we help you move forward with confidence, clarity, and compliance.
