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How Australian Income Tax Works

Australia uses a progressive marginal tax system. For FY2025–26, the brackets are: $0–$18,200 (0%), $18,201–$45,000 (19%), $45,001–$135,000 (32.5%), $135,001–$190,000 (37%), and $190,001+ (45%). These rates apply to income within each bracket — not your entire income. The 2% Medicare levy applies to most taxpayers above the low-income threshold.

Your marginal tax rate is the rate on each additional dollar earned. Your effective rate is your total tax divided by total income — always lower than your marginal rate. On $90,000, your marginal rate is 32.5%, but your effective rate (including Medicare levy) is approximately 23.3%. This distinction matters for comparing salary offers and assessing the value of deductions.

The Low Income Tax Offset (LITO)

The Low Income Tax Offset reduces tax payable for individuals earning below $66,667. At maximum, LITO provides $700 in tax reduction for those earning $37,500 or less. It phases out at 5 cents per dollar between $37,500 and $45,000, then at 1.5 cents per dollar to $66,667. LITO is applied automatically — you don't need to claim it.

Stage 3 Tax Cuts — What Changed from 1 July 2024

From 1 July 2024, Stage 3 restructured two key brackets. The 32.5% rate's upper threshold rose from $120,000 to $135,000, and the 37% bracket was compressed to $135,001–$190,000. The net effect is a tax cut of up to $4,529 per year for high-income earners and modest savings across the $45,000–$135,000 band.