How Income Tax Is Calculated in Australia: A Simple Explanation With Examples

Australia uses a progressive tax system, which means you pay different rates of tax on different portions of your income — not a single flat rate on all of it. Think of it like filling up buckets. Your first $18,200 goes into the tax-free bucket and you pay nothing on it.

The next chunk of income ($18,201 to $45,000) goes into the 16% bucket. The next portion ($45,001 to $135,000) goes into the 30% bucket.

Then $135,001 to $190,000 is taxed at 37%, and anything above $190,000 is taxed at 45%. The crucial point is that each rate only applies to the income within that specific bracket — not to your entire income. Someone earning $50,000 doesn't pay 30% on all $50,000. They pay 0% on the first $18,200, then 16% on the next $26,800, then 30% only on the final $5,000 above $45,000.

This is the single most misunderstood concept in Australian tax, and understanding it's the key to making smart financial decisions.

Let us calculate the income tax on an $85,000 salary, step by step. Step 1: The first $18,200 is tax-free. Tax so far: $0.

Step 2: Income from $18,201 to $45,000 is $26,800, taxed at 16%. Tax: $26,800 x 0.16 = $4,288.

Step 3: Income from $45,001 to $85,000 is $40,000, taxed at 30%. Tax: $40,000 x 0.30 = $12,000. Step 4: Total income tax: $0 + $4,288 + $12,000 = $16,288. Step 5: Add Medicare levy of 2%: $85,000 x 0.02 = $1,700.

Step 6: Total tax plus Medicare: $16,288 + $1,700 = $17,988. That leaves take-home pay of $67,012 per year, or $2,577 per fortnight.

Your marginal tax rate (the rate on your next dollar) is 30%, but your effective (average) tax rate is only 21.2% ($17,988 / $85,000). This distinction matters enormously for financial planning.

Every Australian resident for tax purposes receives a tax-free threshold of $18,200. The upshot: you can earn up to $18,200 per year without paying any income tax at all. For someone working a full-time minimum wage job ($24.95/hour, 38 hours/week, roughly $47,700/year), the tax-free threshold shelters about 38% of their income from tax entirely.

When you start a new job and fill out the Tax File Number Declaration, you choose whether to claim the tax-free threshold from that employer. You should only claim it from one employer — if you have two jobs and claim it from both, you will likely have tax withheld at too low a rate and will owe money when you lodge your tax return.

Non-residents don't receive the tax-free threshold and are taxed from the first dollar at 30%. The tax-free threshold is not indexed to inflation, which means it has stayed at $18,200 since 2012-13, gradually becoming less generous in real terms as wages have increased.

Your marginal tax rate is the rate of tax you pay on your last (or next) dollar of income. Your effective tax rate is the average rate across your entire income. These two numbers are always different in a progressive system, and confusing them leads to the most common tax myth in Australia.

For someone earning $85,000, the marginal rate is 30% (because $85,000 falls in the $45,001-$135,000 bracket), but the effective rate is only 19.2% (just income tax, before Medicare). For someone earning $150,000, the marginal rate is 37%, but the effective rate is 24.6%.

The marginal rate is what matters for decisions like salary sacrifice and deductions — a $1,000 deduction saves you $300 if your marginal rate is 30%, or $370 if it's 37%. The effective rate is what matters for understanding your overall tax burden compared to other countries or other income levels. Neither rate tells the whole story alone — you need both for informed financial planning.

Income tax is not the only deduction from your gross pay. The Medicare levy of 2% applies to almost all residents, adding $1,700 on an $85,000 salary. If you've a HECS-HELP, VET Student Loan, or similar study debt, compulsory repayments are deducted once your repayment income exceeds $67,000 for 2025-26 (marginal system from 1 July 2025).

At $85,000, your HECS repayment is $2,700 per year (15% of the $18,000 above the threshold), or $104 per fortnight. Your employer withholds this automatically if you ticked the HECS box on your TFN declaration.

Then there's superannuation — your employer must contribute 12% of your ordinary time earnings on top of your salary ($10,200 on an $85,000 base), but this does not reduce your take-home pay unless you are salary sacrificing. Finally, if you opted into salary sacrifice arrangements for super, novated lease, or other items, these reduce your taxable income. The interaction between all these components is why a good calculator is invaluable — try our Tax Calculator.

This is the most persistent tax myth in Australia and it is completely wrong. Because of the progressive system, a pay rise will never leave you with less money in your pocket. If you earn $85,000 and receive a $5,000 raise to $90,000, only the additional $5,000 is taxed at the marginal rate of 30% — you pay $1,500 more in tax and keep $3,500 more.

Your tax on the first $85,000 does not change at all. The myth likely persists because people notice a bigger tax withholding on their first higher payslip, or because they lose income-tested benefits like Family Tax Benefit at certain thresholds.

Quick version: Another common misconception is that overtime is taxed at a higher rate. Overtime is taxed the same as ordinary income — it just pushes more of your total income into a higher bracket, so the marginal rate on those extra dollars may be higher than your average rate.

But again, the extra income always leaves you better off after tax.

Use our Pay Calculator to model exactly how a pay rise or overtime affects your take-home pay.