A lot of people keep on wondering if they need to know about the tax brackets in Australia. There are several reasons why an individual who earns money must know about tax rates.
Knowing your tax brackets will help you figure out how much money you will be receiving in your bank account once the income tax has been deducted. Another reason is you can check if your employer has been taking out the right amount of income tax from your taxable income.
In case not enough tax is being taken out from your taxable income by your employer, you will owe money to the Australian Taxation office when you complete your annual tax return.
Although you will be owed a refund if your employer takes out too much income tax, wouldn’t it be better if you get to take home more money the first time?
So, here is a blog to help you learn everything about the Australian tax brackets.
What are tax brackets?
Tax brackets represent how much income tax you should be paying as per the money you earn as taxable income.
Income tax in Australia has been imposed by the federal government on the taxable income of corporations and individuals. Income tax is levied on progressive rates on individuals and for corporations at one of two rates.
What is taxable income?
It is the difference between the assessable income and allowable deductions. There are three major kinds of assessable income for individual taxpayers. These are:
- personal earnings (salary and wages)
- business income
- capital gains
The taxable income of an individual is taxed at progressive rates from 0 to 45%, along with a medicare levy of 2%. However, there are two tax rates for the income generated from a company, 27.5% or 30% as per the annual turnover (but it is subject to dividend imputation).
What are the 2023-24 tax brackets in Australia?
You must remember that tax brackets can change between tax years. So, it is essential that you select the correct financial year while looking at tax brackets.
If you are looking for individual income tax rates for 2023-24, here is a table for you.
(*These tax rates may not remain the same over time, which is why you should reach out to the ATO’s website to get the current tax rates applicable.)
The above rates don’t include the Medicare levy of 2%.
To make it easier to understand, here is an explanation of these tax brackets, especially for the people who are paying income tax for the first time.
If your taxable income earned in the financial year 2022-23 is between $0 and $18,200 per annum, you won’t pay income tax. This is known as the tax-free threshold.
What if you make $32,000 as taxable income? Wages or salaries earned between $18,200 and $45,000 are taxed at 19 per cent for each dollar earned over $18,200.
In simpler terms, for the first $18,200 of your income, your tax bill is zero. For the remaining $13,800 (for a total income of $32,000), you will have to pay 19 cents in income tax.
Foreign residents for tax purposes
Foreign residents, for tax purposes, will have to pay tax on the income as per the following table:
If you are still under the age of 18 but receive unearned income, a special rate will be applicable. (Reach out to the office website of the Australian Taxation Office to know more about this.)
Working holiday makers
The following rates will be applicable to you as a working holiday maker if you are:
- A foreign resident or
- An Australian resident who is not from an NDA (non-discriminatory article) country.
You will be considered a working holiday maker if you have a visa subclass:
- 462 (work and holiday)
- 417 (working holiday
Exception to the Australian tax brackets
There are exceptions to the Australian tax brackets. If any of the following is applicable to you, different tax brackets will be used:
- You are a foreign resident for tax purposes.
- You are a child under the age of 18 and receive unearned income (It includes the unearned income from interest or dividends). In this case, you will pay as per special rates.
- You are a working holidaymaker (you are on a working visa in Australia).
The difference between the marginal tax rate and the average tax rate
Have you heard people around you discussing the marginal tax rate and average tax rate? So let us help you understand the difference between the two:
Marginal tax rate
The marginal tax rate is the rate of tax you pay on your next dollar of income. It is often referred to as the “marginal tax bracket” or “top tax rate”.
It is a progressive rate that increases as your income rises through various income thresholds or tax brackets. Australia has several income tax brackets, each with its own marginal tax rate.
Average tax rate
The average tax rate is the total amount of income tax you pay divided by your total taxable income. It is also known as the “effective tax rate”.
It represents the overall percentage of your income that goes toward taxes. The average tax rate gives you a broader view of your tax burden and takes into account all income levels and tax brackets.
Assessable income – what is included?
You have to declare assessable income on your tax return every year. The following can be included in your assessable income:
Such income may include all the income you may receive for part-time, full-time or casual work. The following may be examples of the same:
- Wages, salary, bonuses, parental leave pay, commissions, payments from a work-related insurance scheme;
- Allowance received from the employer (for instance, travel, car, clothing, laundry, meal, special duties, qualifications or work conditions allowances);
- Other income, such as awards, tips or discounted employee shares;
- Lump sum payment (one such example would be when an employee leaves a job and gets paid out for the unused leaves);
- Reportable fringe benefits that are above $2,000 that you received over a 12-month period. For instance, you use a company car for private purposes. (Although you must declare fringe benefits, you do not have to pay tax on it.)
Super pensions and annuities
When you receive a pension from the super fund, the following three different components may be present:
- A taxed element
- An untaxed element
- A tax-free element
You may have to declare both the untaxed and taxed elements as income (depending on your age) in the financial year of receiving the payments. By this, the Australian Taxation Office can determine your overall tax obligation or refund.
Investment income includes the following:
- Rent from an investment property
- Share dividends or returns from managed funds
- Interest received from accounts with banks or other financial institutions
- Capital gains made on the sale of an asset
You will need to declare the government payments on your tax return, such as the Age Pension or career payments.
Although there are some government payments that are tax-exempt, you will still have to declare them. Why? Because such government payments may affect your eligibility for other government benefits and tax offsets.
Other kinds of income included in assessable income are:
Some payments that are not included are:
- The tax-free component of eligible termination payments received upon leaving the employer
- Genuine redundancy payments (only up to the specific limits based on the length of service of the employee)
- Child support or maintenance payments
- Lump sum payments for insurance policies like for total and permanent disability.
Deductions can help you reduce your assessable income, and as a result, you will reduce the amount of tax you need to pay.
However, deductions should not be confused with tax offsets. While deductions help you reduce your assessable income, tax offsets, on the other hand, reduce the tax payable on taxable income.
Here’s a list of the most common deductions:
- Work-related expenses (vehicle & travel, clothing laundry, home office, phone and internet, overtime meals, self-education, tools and equipment or other work-related expenses)
- The cost of managing your tax affairs
- Gifts and donations
- Interests, dividends and other investment income deductions
- Personal super contribution
To know more about the deductions you may be eligible for, reach out to Clear Tax accountants.
Income tax offsets, levies and surcharges
If you are a lower-income earner and an Australian resident, Income tax offsets can help you reduce your tax bill.
Levies are extra fees imposed by the government to support particular initiatives, like healthcare, disaster relief, or public insurance programs. These charges are typically determined based on a percentage of your taxable income or another applicable measure.
Surcharges are additional taxes imposed in specific scenarios or on particular individuals to dissuade particular actions or tackle specific problems. Typically, these taxes are calculated as a percentage of one’s income or assets.
Low-income tax offset (LITO)
Between the years 2018-19 and 2021-22, you might have been eligible to receive either one or both of the following:
- LITO – Low-income tax offset (for those earning up to $66,667)
- LMITO – Low and middle-income tax offset (for those earning up to $126,000)
However, since 1 July 2022, people earning up to $66,667 may be eligible for the LITO (low-income tax offset) only. Low and middle-income tax offset ended on 30 June 2022.
The amount of LITO you receive will depend on your taxable income.
- If you earn $37,500 or less, you will receive the maximum offset of $700.
- If your taxable income is between $37,501 and $45,000, you can receive $700 minus 5 cents per $1 above $37,500.
- And if you earn between $45,001 and $66,667, you will receive $325 minus 1.5 cents per $1 above $45,000.
*The above-mentioned data is as per the information available on the official website of the ATO. To know more about this, you should reach out to their website.
Seniors and Pensioners Tax Offset or SAPTO
As the name suggests, this tax offset is available to eligible seniors and pensioners. In specific cases, it might eliminate a recipient’s tax liability and the need to lodge a tax return. However, for this, you would need to consult a professional or go to the ATO’s website.
Medicare provides Australian residents access to universal health care. Medicare is partly funded by the Medicare levy.
Medicare levy is the 2% of your taxable income, and it is paid in addition to the tax payable on your taxable income. It applies only to the residents.
The employer usually withholds enough tax to cover the Medicare levy. However, the exact amount is going to be determined by the ATO once you submit your tax return.
Medicare levy surcharge (MLS)
If you do not have adequate private health insurance and you earn above a specific income, an additional Medicare levy surcharge is payable.
The MLS rate or the Medicare levy surcharge rate of 1%, 1.25% or 1.5% is levied on the following:
- Your taxable income
- Total reportable fringe benefits
- The amount on which family trust distribution tax has already been paid.
The ATO uses a specific definition of income to work out if an individual needs to pay the MLS and the rate that will apply, called ‘income for MLS purposes’. You should use the ATO’s website to learn about the eligibility and other conditions.
These are just a few key points on this topic. For a more in-depth understanding and additional insights, we encourage you to explore further resources and consult with experts in the field.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.