What is Income Tax?
Income tax is the primary tax levied by the Australian government on the earnings of individuals and businesses. The money collected helps fund public services like healthcare, education, defence, and infrastructure. For a complete breakdown of your salary, use our Australian salary and tax calculator.
In Australia, income tax is progressive, which means the rate of tax you pay increases as your income rises. This system is designed to ensure that those with a higher capacity to pay contribute a larger proportion of their income in tax.
How is Tax Calculated?
Your income tax is calculated based on your taxable income for a financial year (1 July to 30 June). Taxable income is your gross income minus any allowable deductions.
Formula: Taxable Income = Gross Income - Allowable Deductions
This taxable income is then applied to a set of marginal tax brackets to determine the total amount of tax you owe. This also influences other obligations like the Medicare Levy. To see how deductions can affect your tax, you can use our superannuation calculator to model salary sacrifice.
What is Pay As You Go (PAYG) Withholding?
If you're an employee, you don't have to pay your income tax in one lump sum at the end of the year. Instead, your employer withholds a portion of your salary or wages from each payment and sends it directly to the Australian Taxation Office (ATO). This is known as the Pay As You Go (PAYG) withholding system.
The amount withheld is an estimate of your final tax liability. When you lodge your tax return, you reconcile the amount withheld with the actual tax you owe. If too much was withheld, you get a refund; if not enough was withheld, you'll have a tax bill to pay. This is also influenced by other factors such as whether you have a HELP/HECS debt.