The Australian taxation system imposes financial obligations on taxpayers within Australia. Generally, individuals and business are required to pay taxation and penalties, interest charges and offences exist relating to non-compliance with taxation obligations.

Contributor

Daniel Smedley

Accredited Tax Law Specialist

How is your income tax liability determined?

Last updated

1 July 2020

You are liable to pay tax on your taxable income earned over an income year. For the majority of taxpayers, the income year runs from 1 July to 30 June. The process for determining the amount of income tax you are required to pay is outlined in the table below.

ASSESSABLE INCOME (including net capital gains)
less
Allowable deductions
equals
TAXABLE INCOME
multiplied by
Applicable marginal tax rate
equals
TAX ON TAXABLE INCOME
less
Rebates and tax offsets
equals
TAX PAYABLE
plus
Medicare levy and surcharge
plus
Higher education debt repayments
less
Tax paid during the year
equals
REFUND OR AMOUNT OWING
Process to determine how much tax you owe

The elements of the process can be described as:

  • Assessable income is the income on which tax is assessed or levied. If you are an Australian resident for tax purposes, it includes income you have earned anywhere in the world. It includes ‘ordinary income’ (i.e. amounts that courts have determined to be income), and ‘statutory income’ (i.e. amounts that are specifically included in assessable income by the Acts). Common types of assessable income include salary and wages, termination payments from employment, dividends, interest and rent received, and net capital gains derived during the year.
  • Allowable deductions are amounts spent to earn an assessable income – other than amounts that are capital, or private and domestic (e.g. clothing, child care and the cost of getting to and from work are private and domestic expenses, and cannot be deducted).
  • Marginal tax rate is the tax rate that applies to your level of taxable income. The greater the amount you earn, the more tax you pay; not only because you have received more dollars, but because higher incomes attract higher tax rates. Changes to the marginal tax rates were introduced by the federal government in their 2020–2021 budget. A comparison between the marginal tax rates for the 2019–2020 financial year, and those to take effect from 1 July 2020 and from 1 July 2024 are shown in the table over the page.
  • Rebates or tax offsets are direct reductions in the tax you must pay. It includes dependants rebates, the Family Tax Benefit, childcare tax offset, private health insurance rebate, low income rebate, senior Australians tax offset, medical expenses rebate, and franking credits attached to dividends received.
  • Higher education debts include the Higher Education Loan Program (HELP) and the Higher Education Contribution Scheme (HECS).
  • Medicare levy is paid at a flat rate of 2 per cent of your entire taxable income unless you are a low-income earner. Also, a Medicare levy surcharge is applicable if your income exceeds a certain threshold and you do not have private health insurance. The surcharge is calculated at the rate of 1–1.5 per cent of your income.
  • Tax paid during the year primarily consists of amounts paid under the Pay-As-You-Go (PAYG) system, including amounts withheld from your salary and wages by your employer, or (if you conduct your own business) tax instalments paid during the year. You will receive a refund if you have paid more tax during the year than is required. You have to pay more tax when your tax liability is greater than the tax instalments already forwarded to the ATO on your behalf.
2019–2020 financial yearFrom 1 July 2020From 1 July 2024
Rate %Income $Rate %Income $Rate %Income $
Zero bracket00–1820000–1820000–18200
First bracket1918201–370001918201–450001918201–45000
Second bracket32.537001–9000032.545001–1200003045001–200000
Third bracket3790001–18000037120001–180000See aboveSee above
Top rate45180000+45180001+45200001+
A comparison between the marginal tax rates for the 2019–2020 financial year, and the marginal tax rates to take effect from 1 July 2020 and from 1 July 202
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