Marginal tax rates: Australian resident individual taxpayers

Australia uses a progressive tax rates scale for individuals, meaning not every dollar earned is taxed at the same rate. Resident individuals enjoy a “tax-free threshold” (ie their first $18,200 of taxable income is not taxed at all) regardless of how much they earn. This means that the first $18,200 of taxable income derived by a resident individual is tax-free (note, however, that the low income rebate may apply to effectively increase this threshold).

Taxable income in excess of the threshold is taxed at progressive rates of tax, ie the average tax rate increases as the taxable income increases.

Residents, non-residents and minors

In determining the rates of tax applicable to individual taxpayers, a distinction is made between residents and prescribed non-residents.

For tax rate purposes only, a person is treated as a resident if the person was a resident at any time during the income year or was in receipt of a taxable Australian social security, military rehabilitation or veterans’ entitlement pension, benefit or compensation. In any other case, the person is classed as a prescribed non-resident.

There is no tax-free threshold for individuals who qualify as prescribed non-residents. They pay tax on the very first dollar of taxable income. However, like residents, the rate of tax increases as the taxable income increases.

Special rules apply in calculating the tax payable on income of a minor. These rules were introduced to discourage income-splitting by diverting income to children, but they are not confined to situations where income-splitting is involved. Under these rules, “unearned income” of minors over a certain level is taxed at the highest marginal rate of tax (45% for 2024–25). The rules apply to income, including capital gains, derived by the minor directly or through a trust. Where the minor is a resident, the special rules do not apply if the relevant income is $416 or less.

Beware of bracket creep

Inflation gradually raises the cost of living, reducing the value of money. As prices climb, people seek higher wages to maintain their standard of living.

But as incomes rise in response to inflation, taxpayers can be pushed into higher tax brackets—even if their real purchasing power hasn’t improved. This phenomenon is known as bracket creep.

Even those who don’t move into a new bracket are not immune. Under the current tax system, a larger share of income is taxed as earnings increase, leading to a higher average tax rate—the total tax paid as a percentage of total income—even if the taxpayer stays in the same bracket (unless they are below the tax-free threshold).

Avoiding bracket creep was one of the key rationales behind Australia’s recent tax reform to cut income tax rates for resident individuals.

2025–26, 2026–27 and 2027–28 income year resident individual tax rates

The rates scale applicable to resident individual taxpayers for 2025-26, 2026-27 and 2027-28 are set out below.

How to calculate tax payable by an individual resident

Tax payable by an ordinary individual resident taxpayer is calculated as follows.

1. Taxable income is calculated. This is assessable income (eg salaries, wages, rents, interest), less all expenditure incurred in deriving that income (eg union dues, travel expenses, depreciation or other work-related expenses) and personal deductions (eg gifts to approved institutions, certain tax-related expenses).
2. The gross tax payable is calculated by applying the general rates of tax to the taxable income.
3. The net tax payable is calculated by deducting from the gross tax any rebates/tax offsets (eg the dependant (invalid and carer) tax offset, the zone rebate and the low income earner rebate).
4. An amount for the Medicare levy must be added equal to 2% of the taxpayer’s taxable income (exemptions and reductions may apply).
5. Where applicable, amounts must be added for Medicare levy surcharge and for HELP repayments.

Example

Jessica, an unmarried resident with no dependants, is a legal officer employed by a government department and has salary income of $80,000 for the 2024–25 income year. Jessica also received interest income of $264. Jessica was covered by private patient hospital insurance in 2024–25.*

To arrive at the actual tax payable/refundable, the net tax payable will generally need to be adjusted for PAYG amounts withheld from salary or wages or from payments where an ABN or TFN has not been quoted, and/or any other credits (eg imputation or franking credits from dividends).

Not the only way to tax

Some argue that a flat tax system—where everyone pays the same rate regardless of income—could make the tax system simpler and more efficient.

However, like many countries, Australia uses a progressive tax system, where higher earners pay a larger share of their income in tax. This approach is intended to promote fairness by aligning tax contributions with income levels.

The real challenge lies in maintaining that fairness over time, especially as economic conditions and income levels change.