Income tax is the most common type of taxation. It is a form of direct tax; this means that it is paid directly by the party it is levied upon. Income tax refers to tax imposed on the income of individuals. Income that can be taxed is referred to as taxable income. Taxable income is an individual’s gross income minus any allowable deductions.
What are allowable deductions?
Allowable deductions most commonly refer to work-related expenses, expenses for business purposes and donations or gifts to certain charities. Work-related expenses can include the cost of buying and cleaning your work uniform if it is a mandatory part of the job and union costs. Expenses for business purposes could include any tools and equipment necessary to earn income. For donations and gifts to charities, the cost can be considered tax deductible as long as no personal benefit is received by making the donation.
Who has to pay Income Tax?
Any person earning above the tax-free threshold is required to file a tax return and contribute to income tax. Currently, the tax-free threshold in Australia is $18,200. This is because it would be inequitable to allow a person who is earning a relatively low salary to pay income tax and be expected to have enough net income to pay for necessary expenses. This is a main reason why Australia has a progressive tax system.
What is a progressive tax system?
It is important for you to have sound knowledge of the economic principles in play in Australia. This is so you are aware of how any changes in your future income will impact the amount of tax you are expected to pay.
A progressive tax system occurs when the tax rate increases as the taxable amount increases. For example, someone who is earning $60,000 will pay less tax than someone earning $100,000. The main advantage of this system is that it relieves the tax burden on people who are low-income earners and thus can only afford to pay less tax.
When do I pay tax?
The Government collects tax on Australians during each financial year. The financial year runs from 1 July to 30 June the following year.
What classifies as income?
Employment Income
The most straightforward source of income is employment income. This is any income which is earned from working a job. This includes a salary, wages, cash and tips, super, and lump sum payments.
Government payments and allowances
Government payments and allowances are another type of income stream. Some payments and allowances are taxable, and some are tax-free. It is always important for graduates to confirm which category their payment falls into. Examples of taxable payments and allowances include Age Pension, JobSeeker Payment and Youth Allowance. Examples of tax-free payments and allowances include Carer Payments and Partner Service Pension (subject to stipulations). Many of these payments have stipulations based on age and other factors, so it is beneficial to visit the Australian Government website to find out whether you have to pay tax on your payments.
Foreign and worldwide income
Another income stream that must be declared is foreign and worldwide income. This includes any income generated overseas from employment services, and any assets and investments. If you have paid tax on foreign earnings already, then it is important to keep a record of this, as you may be eligible to claim a foreign income tax offset.
Investment Income
Investment income must also be declared, including dividends and rental income.
Scholarships
A source of income relevant to students and graduates is a scholarship. There is a criterion that can be accessed on the Australian Tax Office website to see if your scholarship is partially or fully exempt from taxation. Generally, it is dependent on your study and work status.
There are also other sources of income. If you are receiving money, whether it be a one-off payment or a regular payment, it is important to visit the Australian Tax Office website to see whether the money you are earning falls into a taxable or tax-exempt category. This ultimately makes it easier when you file your tax return at the end of each financial year.
How much tax do I pay?
As discussed earlier, people pay a different amount of tax depending on their income. This is established by Australia’s income tax brackets. These brackets are subject to change by the government.
Australian income tax rates for 2023–24 and 2022-23 (residents)
| Income thresholds | Rate | Tax payable on this income |
| $0 – $18,200 | 0% | Nil |
| $18,201 – $45,000 | 19% | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | 32.5% | $5,092 plus 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | 37% | $29,467 plus 37c for each $1 over $120,000 |
| $180,001 and over | 45% | $51,667 plus 45c for each $1 over $180,000 |
Over the past few years, the government has adjusted tax codes. These changes will be effective for the 2024-25 financial year onwards.
The new tax brackets are:
Australian income tax rates for 2024–25 onwards (residents)
| Income thresholds | Rate | Tax payable on this income |
| $0 – $18,200 | 0% | Nil |
| $18,201 – $45,000 | 16% | 16c for each $1 over $18,200 |
| $45,001 – $135,000 | 30% | $4,288 plus 30c for each $1 over $45,000 |
| $135,001 – $190,000 | 37% | $31,288 plus 37c for each $1 over $135,000 |
| $190,001 and over | 45% | $51,638 plus 45c for each $1 over $180,000 |
Read more about the threshold changes on the ATO website here and current resident tax thresholds here.