Understanding Tax Rates in Australia

Understanding tax rates in Australia can be challenging, not to mention complicated if you are trying to work out your individual and business tax obligations simultaneously.

In short, our tax system is progressive, which means the amount of tax you pay increases as your income rises. But it can be confusing when you start hitting different brackets to know how much you need to pay on your individual tax return.

We’ve got the most important information to help clarify everything — from how tax rates are structured to what income bracket you fall into, as well as things like the Medicare levy and payroll tax — so you can get rid of the EOFY paperwork sooner.

What is a tax rate?

A tax rate is the percentage at which an individual (i.e., you) or corporation (i.e., your business) is taxed. It doesn’t matter whether you’re an employee, a sole trader, or run your own business. Higher income earners naturally pay tax at a higher percentage, depending on the amount they make in a year for tax purposes. This ensures everyone in Australia contributes to public revenue in proportion to their ability to earn a living wage.

To make this work, the tax rate has to get a little complicated. As income increases, you’ll hit different thresholds (or income brackets), with each bracket having a set rate that determines how much tax is owed for the financial year.

If you’re wondering why it’s a good idea to learn about tax rates, it’s because it’s a great way to better budget, be more prudent with financial planning, and — perhaps most importantly of all — stay on the right side of the Australian Taxation Office (ATO).

Also, bear in mind that tax rates will change depending on the source of income and the type of entity, such as whether you are doing your taxes as an individual, corporation, or trust.

What are the latest income tax rates and brackets for 2024–25?

In happy news for most Australian residents, 2024–25 is the year of tax cuts. Introduced on 1 July 2024, the stage three tax cuts ease the cost-of-living burden on middle-income earners.

Here’s what they look like for this financial year:

● $0–$18,200 (0% tax rate) – Tax payable: Nil
● $18,201–$45,000 (16% tax rate) – Tax payable: 16c for each $1 over $18,200
● $45,001 – $135,000 (30% tax rate) – Tax payable: $4,288 plus 30c for each $1 over $45,000
● $135,001 – $190,000 (37% tax rate) – Tax payable: $31,288 plus 37c for each $1 over $135,000
● $190,001 and over (45% tax rate) – Tax payable: $51,638 plus 45c for each $1 over $190,000

These cuts mean lower marginal tax rates for most taxpayers, with multi-percentage point reductions on the $18,201–$45,000 and $45,001–135,000 brackets (down from 19% and 32.5%, respectively, for the 2023–24 tax period).

What are marginal tax rates?

Marginal tax rates are a levy applied to each additional dollar of income according to the different tax brackets. Because income is taxed in tiers, you’ll pay tax at a higher rate as your income increases — in other words, you pay more when your taxable income goes up.

Let’s look at the first threshold: your income is taxed at the lowest rate (a flat rate of 0%) up to $18,200. Every subsequent bracket is taxed at progressively higher rates – from 16% right up to 45% for more than $190,000. This system means that higher earners contribute more back into the country, while lower earners benefit from lower rates on their basic income.

What is the tax free threshold?

This is the amount of income you can earn each financial year before you are required to pay tax. The current tax-free threshold is $18,200, which means if your annual income is below this amount, you won’t pay any income tax at all.

This first threshold is in place to reduce the burden on low-income earners and let them keep more of their income. It also influences how much tax is withheld from your pay throughout the year — or your quarterlies for sole traders and other business owners — which can impact your cash flow and potential tax refund at the end of the financial year.

What is payroll tax?

Payroll tax is a state-imposed tax on the wages paid by employers to their employees. If you’re a small business owner, this tax will be calculated based on your total payroll amount and is levied when wages exceed a certain threshold, which varies between states and territories.

In New South Wales, for example, the current annual tax-free threshold is $1.2 million.

State governments use payroll tax to fund public services and infrastructure projects, so it’s extremely important that you register for payroll tax if you are obligated to, and stay on top of your contributions throughout the financial year.

What’s the difference between taxable income vs net income?

Taxable income is the portion of your income that is subject to tax. You can calculate it by subtracting all the allowable deductions from your total income. Net income, on the other hand, is your take-home pay after taxes and other deductions have been subtracted from your gross income.

Think of it this way: while taxable income determines your tax liability, net income reflects the actual amount you have available for spending and saving.

When the Medicare levy applies

The Medicare levy is a separate tax that Australian taxpayers pay to fund our public healthcare system, Medicare. It is 2% of their taxable income and applies to most taxpayers, with some exemptions available for low-income earners and those living in specific circumstances.

It’s also important to note that if you don’t have private health insurance, you might be hit with the Medicare levy surcharge, which is an extra charge for high-income earners without private cover.

How can you minimise the tax you pay for the income year?

● Claim all allowable deductions to reduce your taxable income.
● Make additional superannuation contributions to help lower your taxable income.
● Take advantage of any available tax offsets that you qualify for.
● Review your current investment strategy and leverage anything that offers tax advantages to minimise your overall tax liability.
● Keep accurate records, as proper documentation is the best way to claim all eligible expenses and deductions.
● Consider things like salary sacrificing for benefits like a car or laptop.
● Seek expert advice from a tax professional. They may be able to help maximise your tax-saving strategies while staying compliant with the ATO.
● Tools like Moneysmart’s income tax calculator can help estimate your tax obligations for the financial year.

Getting across tax rates isn’t as complicated as it might seem at first glance. As always, staying informed and proactive about your tax obligations will put you in the best position to make smarter choices that support your personal and business ambitions.