How Australian Income Tax Works in 2025–26
Australia uses a progressive income tax system for resident individuals. The more you earn, the higher the rate applied to each additional dollar. For 2025–26, the tax-free threshold is $18,200 — no income tax is payable on the first $18,200 of taxable income. Beyond that, rates escalate in brackets up to a top marginal rate of 45% for income exceeding $180,000.
The 2025–26 resident individual tax rates (before offsets) are:
| Taxable Income | Tax on This Income |
|---|---|
| $0 – $18,200 | Nil |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 + 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 + 37c for each $1 over $120,000 |
| Over $180,000 | $51,667 + 45c for each $1 over $180,000 |
These rates reflect the Stage 3 tax cuts that took effect from 1 July 2024 (the 2024–25 year) and continue into 2025–26. The key changes from prior years were the reduction of the 32.5% rate and expansion of the 19% bracket, benefiting mid-income earners.
The Low Income Tax Offset (LITO)
The Low Income Tax Offset (LITO) is a tax offset that reduces the amount of tax payable by low-to-middle income earners. For 2025–26, the maximum LITO is $700, available to those with taxable incomes up to $37,500. The offset phases out:
- Full offset of $700 for taxable income up to $37,500
- Reduces by 5 cents per dollar for income between $37,501 and $45,000
- Reduces by 1.5 cents per dollar for income between $45,001 and $66,667
- No offset for income above $66,667
The LITO is applied automatically — you do not need to claim it. Combined with the tax-free threshold, the effective tax-free income for most residents is $21,884 (when LITO fully offsets the tax on income between $18,200 and $21,884).
Medicare Levy
The Medicare levy is a 2% charge on taxable income that funds Australia's public health system. Most Australian residents pay the full 2% Medicare levy. Exemptions apply to low-income earners (full exemption up to a shade-in threshold of approximately $26,000 for singles; partial reduction between $26,000 and $32,500), foreign nationals, and certain other categories.
An additional Medicare Levy Surcharge (MLS) of 1–1.5% applies to higher-income earners who do not hold an appropriate private hospital insurance policy. The MLS applies to income above $93,000 (singles) or $186,000 (families) for 2025–26. Our estimator does not include the MLS — if you are above these thresholds and do not hold private hospital cover, add 1–1.5% to your estimate.
PAYG Withholding and Why Refunds Occur
Pay As You Go (PAYG) withholding is the mechanism by which your employer deducts tax from each pay and remits it to the ATO on your behalf. At the end of the year, the ATO compares the tax withheld with your actual tax liability (based on your lodged tax return). If more was withheld than you owe, you receive a refund. If less was withheld, you pay the difference.
Common reasons for a refund include:
- Work-related deductions (WFH, vehicle, tools, uniform) that reduce your taxable income below what the employer assumed
- Investment deductions (negative gearing losses from rental property) — see our Negative Gearing Calculator
- Charitable donations to DGRs
- Changing employment during the year and being over-withheld at one job
- Working part of the year only (the withholding tables assume you earn the same each period all year)
Common reasons for a tax bill include: working multiple jobs (especially if you claimed the tax-free threshold at both), under-declaring income to your employer, significant investment income (interest, dividends, capital gains) not subject to withholding, or under-withholding due to incorrect TFN declaration.
Maximising Your Tax Refund Legally
The most reliable way to increase your tax refund is to ensure you claim all legitimate deductions. Key areas often missed:
- Working from home: Use our WFH Tax Calculator to estimate your 70c/hour deduction. Full-time remote workers can claim over $1,000.
- Vehicle expenses: If you use your car for work (not ordinary commuting), you can claim using the cents per kilometre method (up to 5,000 km at 88c/km for 2025–26) or logbook method.
- Work-related self-education: Courses, seminars, and textbooks related to your current role are deductible if they maintain or improve your current skills (not for a new career).
- Union fees and professional subscriptions: Fully deductible if related to your income-earning activities.
- Salary sacrifice: Contributing more to super via salary sacrifice reduces your taxable income. Use our Salary Sacrifice Calculator to model the impact.
For authoritative guidance on what you can and cannot deduct, refer to the ATO's tax return guide.
Lodging Your Tax Return
Australians can lodge their tax return via:
- myTax (myGov): Free, online, available from late July each year when your income statement is finalised. Suitable for most straightforward returns.
- Registered tax agent: Professional preparation and lodgement — often extends the lodgement deadline (sometimes to May of the following year). Tax agent fees are deductible in the following year.
- Paper lodgement: Still available but significantly slower for refunds. Not recommended for most taxpayers.
The standard lodgement deadline is 31 October. If you use a registered tax agent, you generally have until 15 May or later of the following calendar year, depending on your circumstances.