Understanding How Tax is Calculated in Australia

Getting your taxes done is something we have to do every year, but it can be a source of a lot of anxiety for many people. If you don’t know how tax is worked out and what all the technical words mean (not to mention constant changes in tax policies or tax rates) then it’s easy to get confused. This could mean you end up missing out on getting the tax refund you deserve.
 
The simple way to deal with this is to be informed and understand how taxes are calculated in Australia. To make it easy for you, we’ve put together this simple guide that will give you a snapshot of how taxes work for individuals and businesses in Australia.
 
It will only take you a few minutes to read and it’s a solid investment in your future. If you have any questions about any of the information below, just contact one of our expert tax consultants here at H&R Block and they would be happy to give you more details.
 

Tax basics

Let’s start at the beginning with individual income tax. This is the tax you pay to the government each year on all forms of income, including wages, business profits and investment returns, and it can also apply to income from the sale of assets such as a property or shares.
 
You don’t have to pay taxes on the first $18,200 that you earn, but anything above this will be taxed on a progressive tax scale, which means the percentage increases the more you earn. There are certain forms of income that are not subject to taxes such as gifts or prizes, or some government pensions and payments. But this can vary so, if in doubt, check with your accountant.
 
Everything else is taxable and it’s your obligation to make sure you declare the correct income, make only valid deductions and pay the correct taxes each year. Even if your employer is taking taxes out for you each pay cycle, you need to make sure the numbers are right at the end of each financial year, otherwise you could be penalised. It’s also important to check as they might have paid too much and you could qualify for a refund.
 

How income tax is calculated for individuals

All you have to do is figure out your taxable income, which you can calculate by subtracting any allowable deductions from your assessable income. The amount that remains is your taxable income.
 
Taxable income = income earnings – deductibles
 
Deductibles are expenses directly relating to your job, provided you paid for it yourself and can provide proof of purchase (usually a receipt). Eligible deductions vary between professions and it is worth getting the assistance of an experienced tax consultant when checking your deductions to make sure you don’t miss any that are relevant to your work.
 
Next you need to work out the tax owing on this income. Tax rates in Australia vary according to how much you earn, up to a maximum of 45% for top earners, and whether you’re an Australian resident or not.  But don't worry, even if you are in the top tax bracket of 45%, you will not pay 45% on all of your income. If you are a resident of Australia, you will not pay tax on the first $18,200 you earn. You will pay at a rate of 16% on the amount you earn between $18,200 and $45,000 in the 2024-25 year (this has decreased from 19% in the 2023-24 year). The tax rates increase progressively, and you will only pay tax at a rate of 45% on the amount your earn over $190,000 in the 2024-25 year (this has increased from $180,000 in the 2023-24 year). You can view current personal income tax rates and thresholds here.

For example, if  you earn $42,000, in the2025 year, the tax  you pay will be: 

($42,000 - $18,200) x 16% = $23,800 x 16% = $3,808

For the 2024 year, the tax on $42.000 would be

$42,000 - $18,200) x 19% = $23,800 x 19% = $4,522
 
You also need to factor in some other items such as the Medicare levy, which is an amount of money collected in the same way as income tax that goes towards funding the public health system in Australia. The amount is usually 2% of your taxable income, although some people may pay less or none at all, depending on their circumstances. If you earn over a certain salary threshold and do not hold adequate private health insurance, you may also need to pay a Medicare levy surcharge of up to 1.5%.
 
You may also qualify for some government rebates and offsets, such as the family tax benefit or the private health insurance offset.
 
If your taxes are straightforward, then it’s possible to do them online. But if you have more than one source of income (such as a wage or salary, plus income from a property or shares) or qualify for any additional benefits or deductions then it’s a good idea to work with a tax agent. It will cost you a fee but can save you so much more in the long run as they will make sure you get all the right deductions and benefits, and enjoy the largest possible refund.
 

Individual tax refunds

Once you have lodged your annual tax return, the ATO will crunch the numbers and assess whether you have paid the correct amount of tax in the relevant financial year.
 
This can vary as your employer takes out taxes for you each pay cycle based on your pay rate. But this doesn’t take into account any deductions that you might be able to claim, or any benefits you might be able to receive.
 
So once you do your tax return and include all of these additional details, it could show that you have actually paid too much tax. If this happens, you’ll receive the additional amount as a tax refund. In Australia the average tax refund is $2800, which is a nice little windfall to get at the end of the financial year.
 
If, for some reason, you’ve not paid enough tax during the year, the ATO will issue you with a bill for the amount owing. This is more likely to happen if you’re a sole trader or contractor with a varying income, as it’s your responsibility to pay your own taxes throughout the year.
 

How tax is calculated for businesses

A sole trader is a business that is fully owned and run by one person, and the taxes for this are much the same as they are for an individual tax payer.
 
Alternatively, you might choose to set up as a company, which is a legal entity set up to conduct commercial transactions.
 
Companies can get access to a range of benefits such as special corporate tax rates, but essentially the whole process is much the same as it is for individual income tax. All money coming into the business (such as sales revenues, interests, profitable transactions and capital gains) is subject to taxes.
 
You can reduce your taxable income by claiming any legitimate business expenses as deductibles, such as such as salaries, super contributions, capital expenses and maintenance costs. But it is important that you only claim legitimate business-related expenses as deductibles, and never include any personal costs such as personal travel.
 
Taxable income = income from business – deductibles
 
For a company, the taxable income for the business needs to be multiplied by the relevant tax rate for the business to work out the amount of tax owing.
 
Tax payable = taxable income x tax rate
 
The general tax rate for companies in Australia is 30%, although small or medium sized businesses might benefit from a slightly lower tax rate of 25% (2021/2022 financial year onwards).
 
Business owners also need to keep Goods and Services Tax (GST) in mind. This is a value added tax of 10% that is added to nearly everything you buy in Australia and businesses in Australia need to register for and then collect GST on sales, and then pass on the difference when completing their taxes. This is usually does through a quarterly Business Activity Statement (BAS).
 

Don’t forget the deadlines

Whether you’re doing your individual tax return or a corporate tax return, it’s crucial that you keep deadlines in mind. It should be lodged by 31^st October if doing it yourself online or on paper, or you can in some cases lodge after this date if you are registered with a tax agent. If you are behind in lodging a tax return, you should contact a tax agent as soon as possible to avoid or minimise possible penalties. You can view a more detailed outline of ATO deadlines here.
 

Get help from the experts

 Working with an experienced and professional tax consultant is the best possible way to minimise stress and make sure you stay on top of this at tax time. At H&R Block our expert consultants know all the finer details and are here to make things as easy as possible for you. Call us on 13 23 25 or click here to book an appointment with your nearest H&R Block office.
 

Learn more about tax with H&R Block Income Tax Course

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