Calculators

Australian Income Tax: How It Actually Works

Brackets, marginal rates, the Medicare levy, offsets and why your refund is not a bonus. The 2026-27 system explained end to end.

9 min read · published 2026-09-12

Calculators in this guide

The brackets, and the myth about them

Australia taxes income in slices. For 2026-27 the first $18,200 is untaxed, income between $18,201 and $45,000 is taxed at 15%, from $45,001 to $135,000 at 30%, from $135,001 to $190,000 at 37%, and anything above $190,000 at 45%. The 15% rate replaced 16% on 1 July 2026 under legislated staged cuts, with a further reduction to 14% scheduled for 2027-28.

The persistent myth is that crossing into a higher bracket taxes all of your income at the higher rate, so a pay rise can leave you worse off. It cannot. Only the dollars inside each band are taxed at that band's rate. Earning $45,001 means precisely one dollar is taxed at 30%. The $26,800 below it is still taxed at 15% and the first $18,200 is still untaxed. There is no income at which working more leaves you with less, although a study loan crossing its threshold can make the increase smaller than expected.

This is why your marginal rate and your average rate differ so much. Someone earning $85,000 has a marginal rate of 30% but pays closer to 19% of their income in income tax, because the lower brackets apply to everyone regardless of what they earn.

The Medicare levy, and the surcharge that is not the same thing

On top of income tax sits the Medicare levy: 2% of taxable income, funding the public health system. It has a low-income threshold below which it is reduced or not charged at all, and that threshold is higher for families and for seniors.

The Medicare levy surcharge is a different creature entirely. It applies only to higher earners who do not hold private hospital cover, at 1%, 1.25% or 1.5% depending on income. For 2026-27 it starts above $105,000 for singles and $210,000 for families, with the family threshold rising by $1,500 for each dependent child after the first.

The surcharge is designed to be avoidable, and for many people a basic hospital policy costs less than the surcharge it prevents. The trap is that income for surcharge purposes is broader than taxable income. It includes reportable fringe benefits, reportable super contributions and net investment losses. So people who salary package or negatively gear can cross the threshold without their salary suggesting it.

Offsets are not deductions

A deduction reduces the income you are taxed on, so it is worth your marginal rate: a $1,000 deduction saves $300 at the 30% rate and $450 at 45%. An offset reduces the tax itself, dollar for dollar, and is worth the same to everyone who qualifies.

The low income tax offset is the main one most people encounter. It is worth up to $700, stays at that level up to $37,500 of income, then phases down by 5 cents in the dollar to $45,000 and 1.5 cents in the dollar above that, disappearing at $66,667. Combined with the tax-free threshold, it means most residents pay no income tax at all until around $22,500.

Crucially the low income tax offset is not refundable. It can reduce your tax to zero but cannot create a payment on its own. Which is why someone with no tax to pay receives nothing from it. Franking credits, by contrast, are refundable, which is why a retiree with franked dividends and no other income receives cash from the ATO.

Why your refund is your own money

Employers withhold tax each pay period using ATO schedules, which approximate what you will owe for the year rather than calculating it exactly. At the end of the year your return works out the real figure, and the difference between that and what was withheld is your refund or your bill.

A large refund is therefore not a windfall. It means too much was withheld during the year. You lent the government money interest-free. A bill usually means the opposite, or that something outside payroll happened: a second job where both employers applied the tax-free threshold, untaxed interest or dividends, a capital gain, or a study loan your employer did not know about.

The tax-free threshold should be claimed from one employer only, normally the one paying you the most. Claiming it twice is the single most common cause of an unexpected tax bill for people working two jobs.

Deductions worth knowing about

You can deduct expenses incurred in earning your income, provided you were not reimbursed and you have records. The common categories are work-related travel between workplaces, tools and equipment, protective clothing and uniforms with a logo, self-education directly related to your current role, professional memberships and subscriptions, and a portion of home office costs if you work from home.

The $300 figure people remember is a substantiation rule, not a free deduction: below $300 of total work expenses you do not need receipts, but you still need to have actually spent the money and be able to explain how you calculated it.

What you cannot deduct catches people out more often. Travel between home and a regular workplace is private, not deductible. Conventional clothing is not deductible even if your employer requires it. Self-education that qualifies you for a new occupation rather than improving your current one is not deductible. And the cost of managing your tax affairs is deductible, which is why the fee for a tax agent appears on next year's return.

Study loans, super and the rest of the payslip

If you have a HECS-HELP, VET Student Loan or SFSS balance, your employer withholds a compulsory repayment once your income passes the threshold, $69,528 for 2026-27, and the amount is worked out marginally on income above that point rather than as a flat percentage of everything you earn.

Superannuation sits outside the tax you pay on salary. Your employer contributes 12% of ordinary time earnings on top of your wage, and the fund pays 15% contributions tax on it. Salary sacrificing extra into super converts income taxed at your marginal rate into a contribution taxed at 15%, which is the main tax planning lever available to ordinary employees.

The concessional cap for 2026-27 is $32,500 including employer contributions, so on an $85,000 salary there is roughly $22,300 of room. Exceeding the cap removes the concession on the excess, and Division 293 adds a further 15% for people whose income plus contributions exceeds $250,000.

Questions people ask

What are the Australian tax brackets for 2026-27?
Nothing on the first $18,200; 15% from $18,201 to $45,000; 30% from $45,001 to $135,000; 37% from $135,001 to $190,000; and 45% above $190,000. The 2% Medicare levy applies on top. The 15% rate came into effect on 1 July 2026, replacing the previous 16%.
How much can I earn before paying tax in Australia?
The tax-free threshold is $18,200, but the low income tax offset extends the practical point at which tax becomes payable to around $22,500 for most residents. Above that, tax is payable on the portion of income above $18,200 only. The Medicare levy has its own separate low-income threshold.
Should I use a tax agent or lodge myself?
Straightforward salary-only returns with a handful of deductions are quick through myTax, which pre-fills most of the information. A tax agent earns their fee when your affairs involve rental property, capital gains, business income, shares with franking credits, or multiple income sources. And the fee itself is deductible next year. Using an agent also extends your lodgement deadline.
When is my tax return due?
31 October if you lodge yourself. If you are registered with a tax agent before that date, the agent's lodgement program usually extends the deadline into the following year, sometimes as late as May. Registering late does not get you the extension, so if you expect to need more time, contact an agent before October.
What happens if I have two jobs?
Claim the tax-free threshold from one employer only, normally the higher-paying one. The second employer then withholds at a higher rate, which is correct. Your combined income sits higher in the brackets. Claiming the threshold twice means both employers withhold as though you earn little, and the shortfall arrives as a bill at lodgement.

Sources

General information only, not personal advice. See the disclaimer. Read how this material is checked.