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.


Daniel Smedley

Accredited Tax Law Specialist

How is your income tax liability determined?

Last updated

1 July 2022

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 ‘Process to determine how much tax you owe’ below.

Process to determine how much tax you owe

ASSESSABLE INCOME (including net capital gains)
Allowable deductions
multiplied by
Applicable marginal tax rate
Rebates and tax offsets
Medicare levy and surcharge
Higher education debt repayments
Tax paid during the year

Elements of the taxation 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 2021–2022 financial year, and those to take effect from 1 July 2024, are shown in the table below.
  • Rebates or tax offsets are direct reductions in the tax you must pay. These include rebates for dependents, the Family Tax Benefit, childcare tax offset, private health insurance rebate, low-income rebate, the tax offset for senior Australians, 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 Australian Taxation Office (ATO) on your behalf.

COVID-19 and allowable deductions

As a result of the COVID-19 pandemic, many people have had to work from home. Individual taxpayers who work from home may be eligible to deduct working from home expenses. These expenses can be calculated using a fixed rate, or actual cost or shortcut method. For more information, see the ATO’s website.

A comparison of the marginal tax rates

From 1 July 2021 to 30 June 2022From 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 2021–2022 financial year, and the marginal tax rates to take effect from 1 July 2024

Income tax and COVID-19 payments and expenses

COVID-19 disaster payments

COVID-19 disaster payments were made to people who were prevented from working in their usual employment due to government health orders. COVID-19 disaster payments received during the 2021–2022 financial year are exempt from income tax. If you received a COVID-19 disaster payment, you do not need to include this payment in your tax return.

Pandemic leave disaster payments

Pandemic leave disaster payments were made to eligible individuals who were unable to earn income because they had to self-isolate or quarantine, or because they were caring for someone with COVID-19. If you received a pandemic leave disaster payment during the 2021–2022 financial year, you must include this payment in your tax return as income.

For more information about income tax and COVID-19 related payments, see the ATO’s website.

COVID-19 tests

In your 2021–2022 tax return, you can claim a deduction for costs you incurred for COVID-19 tests. This applies to any test listed in the Australian Register of Therapeutic Goods and includes both polymerase chain reaction tests (PCRs) and rapid antigen tests (RATs).

This deduction only applies if you used the tests for work-related purposes (not for private purposes). That is, you can claim this deduction if:

  • you used a test to determine whether you could attend or remain at work; or
  • you were required to test to undertake travel away from your home overnight for work purposes.

You cannot claim the deduction if:

  • you worked from home and did not intend to attend your workplace; or
  • your employer provided the test or you were reimbursed for the cost of the test.

To claim the deduction, you must submit records that prove you incurred the costs of the tests (e.g. receipts) and that you were required to take the tests for work purposes. For more information, see the ATO’s website.

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