Australia has a progressive tax system and because of this we have tax brackets, with each bracket determining the tax rate that applies to income within that bracket (also known as marginal tax rates). As the total taxable income increases, higher tax rates apply to the portion of income that falls above the previous bracket. For example, only income above $37,000 is taxed at 32.50 cents, the income below that level is taxed at the lower rates.
This system is in place to ensure that taxpayers are only taxed according to their means so that as your taxable income increases, so does your tax liability.
In addition to the marginal tax rates, most Australian residents are also required to pay a Medicare levy (of 2%), which is in addition to the marginal tax rates on income. In the case of higher income earners, a Medicare surcharge and a Budget Deficit Levy may also apply.
Working out your individual taxable income and which bracket you fit into is important in understanding how much tax you will have to pay. There are five different tax brackets in Australia.
- $0 – $18,200: $nil tax rate applies. (No tax payable)
- $18,201 – $37,000: 19% tax rate applies to each $1 over $18,200
- $37,001 – $80,000: $3,572 plus 32.5% for each $1 over $37,000
- $80,001 – $180,000: $17,547 plus 37% for each $1 over $80,000
- $180,001 and over: $54,547 plus 45% for each $1 over $180,000
The Top End of Things (Example)
If you earn over $80,001 per annum, you will find yourself somewhere in the top two tax brackets for Australian Residents.
For 2015, a taxpayer earning between $80,001 and $180,001 can expect to pay $17,547 in tax plus a further 37 cents for each $1 over 80,000. So, if you’re taxable income adds up to $100,000 you can expect to pay about $24,577 plus a Medicare levy amount of $2,000.
If you earn $180,001 or more, you will pay $54,546 plus 45 cents for each dollar over $180,000. So, a $200,000 salary will attract a tax bill of $63,096 plus a Medicare levy of $4,000.
Assessing the total individual and family taxable income (plus Private Hospital Insurance Cover) is required in order to determine whether a Medicare surcharge and/or budget deficit levy applies.
And, If You’re Not a Resident of Australia?
The above rates only apply to Australian residents; if you’re a foreign resident earning an Australian income and your circumstances do not qualify you to be considered an Australian Resident for Tax Purposes, then income tax will be applied and charged from the first dollar you earn (no $18,200 tax free threshold applies):
- 0 – $80,000: 32.5c for each $1
- $80,001 – $180,000: $26,000 plus 37c for each $1 over $80,000
- $180,001 and over: $63,000 plus 45c for each $1 over $180,000
There are rules and conditions that apply should an individual wish to be considered an Australian Resident for tax purposes.
Do the Same Rules Apply for Under 18s (minors)?
There are some special rules for income earning minors. In general, income earned as an employee will be taxed according to the marginal tax rates outlined above. However, income that has been distributed to a minor versus earned as an employee, will be taxed at a higher rate. The ATO has this in place to stop parents from securing more profitable tax rates by splitting their income and dividing it amongst their children.
If you’re unsure about where you sit in all of this, or you feel like your employer is withholding too much tax. Get in contact with the experts at Online Tax Australia. We’ll make sure you don’t pay a cent more than you have to.