Understanding Personal Income Tax: Rates, Rules, and Lodgement Explained

Personal income tax applies to individuals earning income from employment, business, or investments. Understanding how it works — from tax rates and deductions to lodgement obligations — helps you meet your responsibilities and manage your finances effectively.

What is the personal income tax ?

I. What Is Personal Income Tax?

1. Definition

Personal income tax (PIT) is the tax individuals pay on money they earn — from wages, investments, or business activities. It’s collected by the Australian Taxation Office (ATO) on behalf of the federal government.

The amount you pay depends on your taxable income and your residency status for tax purposes. In short:

The more you earn, the higher the rate you pay — a structure known as a progressive tax system.

This ensures that people with lower incomes pay little or no tax, while those earning more contribute a greater share.

2. Who Needs to Pay

You need to pay income tax if you:

• Earn money through employment, business, investments, or pensions.

• Are considered a resident for tax purposes (even if you’re not a citizen).

• Are a non-resident earning income from local sources.

• Hold a working holiday visa (417 or 462), which has its own tax rate.

Residency isn’t about your passport — it’s about where you live and work most of the time.

3. The Progressive Tax System

Income is taxed in brackets, with higher portions taxed at higher rates. Only the amount within each bracket is taxed at that rate — not your entire income.

For the 2024–25 financial year, the rates for residents are:

Taxable Income	Rate	Tax Payable on This Income
$0 – $18,200	0%	Nil
$18,201 – $45,000	19%	19c for each $1 over $18,200
$45,001 – $120,000	32.5%	$5,092 + 32.5c for each $1 over $45,000
$120,001 – $180,000	37%	$29,467 + 37c for each $1 over $120,000
$180,001 and over	45%	$51,667 + 45c for each $1 over $180,000

(These figures exclude the Medicare Levy.)

4. Why It Matters

Knowing how income tax works helps you:

• Budget and plan for end-of-year payments.

• Avoid under- or over-paying tax.

• Identify legitimate deductions to reduce your taxable income.

• Stay compliant with ATO requirements.

Understanding the basics now sets you up for more advanced topics later — like PAYG instalments, PSI rules, or tax concessions for small business owners.

II. Understanding How Income Tax Works

Personal income tax applies to the money you earn as an individual — from wages, business income, or investments. To calculate how much you owe, it’s important to understand how personal taxation rates, income brackets, and deductions interact within the system.

1. Assessable and Taxable Income

Your assessable income includes everything you earn within a financial year:

• Salary and wages

• Business or sole trader income

• Investment income (interest, dividends, rent)

• Some government payments and allowances

From this, you can deduct allowable expenses — work-related costs, donations, or self-education — to determine your taxable income.

The ATO uses your taxable income to work out your personal income tax level, applying rates that increase progressively as your income rises.

Tip: Keep records of your income and deductions for at least five years — it’s essential if the ATO reviews your tax return.

2. The Financial Year and Tax-Free Threshold

The financial year runs from 1 July to 30 June. Your tax return covers all income and deductions during this period.

The financial year runs from 1 July to 30 June

Everyone who is a resident for tax purposes can claim a tax-free threshold of $18,200.This means you pay no personal income tax on the first $18,200 you earn. Any income above this threshold is taxed according to the personal income tax brackets set by the ATO each year.

3. Personal Income Tax Rates and Brackets

Australia employs a progressive tax system for Personal Income Tax (PIT). This means your effective tax rate increases as your total income increases.

A tax bracket is a specified range of taxable income that is taxed at a single percentage rate (the marginal rate).

Here are the key concepts:

• Progressive Structure: Higher earnings are taxed at higher marginal rates.

• The Marginal Rule: You only pay the higher rate on the specific portion of your income that falls within that higher bracket, not your entire income.

• Tax-Free Threshold: The first bracket of income (currently up to $18,200) is taxed at 0%, providing immediate relief for low-income earners.

Think of it like filling up multiple buckets with water (your income). Once the first bucket is full (the Tax-Free Threshold), the overflow is taxed at the rate of the next, higher-rated bucket, and so on.

4. Medicare Levy and Other Contributions

In addition to income tax, most residents also pay a Medicare Levy of 2% of their taxable income.If you don’t have private health insurance and earn above a certain threshold, you may also be charged a Medicare Levy Surcharge (MLS).

These are calculated separately from your standard income tax and contribute to the public healthcare system.

5. Tools to Estimate Your Tax

You can use several ATO-approved tools to calculate or check your estimated tax:

• ATO Individual Tax Calculator: Estimates your tax based on your income, offsets, and deductions.

• Personal Income Tax Calculator: A simplified version for quick calculations.

• Personal Tax Table PDFs: Available on the ATO site for each financial year.

These tools make it easier to plan ahead, especially if you’re a contractor, freelancer, or sole trader managing personal services income (PSI).

Pro Tip: Recheck your figures each year — even small changes in tax brackets or thresholds can affect how much you pay.

6. Understanding Personal Services Income (PSI)

If you earn income mainly from your personal skills or efforts — for example, as a consultant, designer, or freelancer — the ATO may classify this as Personal Services Income (PSI).PSI has its own set of rules for what expenses you can claim and how you report income.

While PSI doesn’t change your personal income tax rate, it can affect how your deductions are applied.If you operate as a sole trader, you must check whether the PSI rules apply to you before lodging your tax return.

III. Current Individual Tax Rates & Brackets (FY 2024–2025)

This section details the current tax brackets and rates in Australia, effective from 1 July 2024. These rates apply to all individuals with taxable income, including employees and individual business owners (Sole Traders).

1. Resident Tax Rates

This tax structure applies to the majority of individuals who are Australian tax residents. These rates are used to calculate Personal Income Tax (PIT) before factoring in the Medicare Levy.

Taxable Income	Tax Rate	Projected for FY 2025–2026
$0 – $18,200	0% (Tax-Free Threshold)	0%
$18,201 – $45,000	16%	16%
$45,001 – $135,000	30%	30%
$135,001 – $190,000	37%	37%
$190,001 and over	45%	45%

Note: These tax rates do not include the 2% Medicare Levy, which applies to most residents' taxable income. These rates reflect the legislated Stage 3 Tax Cuts and are expected to remain stable for FY 2025–2026.

2. Non-Resident Tax Rates

Tax rates applicable to individuals considered non-residents for tax purposes. They are not entitled to the Tax-Free Threshold.

Taxable Income	Tax Rate	Projected for FY 2025–2026
$0 – $135,000	30%	30%
$135,001 – $190,000	37%	37%
$190,001 and over	45%	45%

3. Example: Basic Personal Income Tax Calculation

An illustration of tax calculation for an Australian Tax Resident with a Taxable Income of $80,000 (Applicable to FY 2024–2025 and projected for FY 2025–2026):

• Calculate PIT: $4,288 (Tax on the first $45k) + 30% of ($80,000 - $45,000) = $4,288 + $10,500 = $14,788

• Medicare Levy: $80,000 x 2% = $1,600

• Total Estimated PIT Payable: $14,788 + $1,600 = $16,388

  
  

4. Common Deductions and Offsets

Deductions reduce your Taxable Income, while tax offsets directly reduce the amount of tax you have to pay.

Common Deduction Types	Brief Details
Work-Related Expenses	Costs incurred directly related to earning your income (uniforms, self-education, tools).
Home Office Expenses	Electricity, internet, phone (if working from home). The current Fixed Rate method is $0.70 per hour.
Depreciating Assets	Computers, phones, tools used for work. The Instant Asset Write-Off (currently up to $20,000 per asset) primarily benefits Sole Traders.
Other Costs	Income protection insurance, cost of managing investments, charitable donations.

Key Tax Offsets

• Low Income Tax Offset (LITO): Provides a tax reduction for low-income earners.

• Small Business Income Tax Offset: Specifically available to Sole Traders, reducing tax payable on business income (up to $1,000).

IV. Sole Trader Taxation

1. How Income Tax Applies to Sole Traders

A sole trader reports all income earned from their business in their individual tax return, under the “business income” section.Instead of paying company tax, your business profits are taxed at the same personal income tax rates that apply to individuals.

What is the Sole trader ?

So if your taxable income falls within a higher bracket, you’ll pay more tax on the portion above that threshold — exactly as outlined in the personal income tax table.

Example: If your total taxable income (including business earnings) is $90,000, your tax will be calculated using the standard ATO individual tax rate schedule, not a separate business rate.

2. Calculating Taxable Income as a Sole Trader

Your taxable income is your total assessable income minus any allowable deductions.

Assessable income may include:

• Sales and service income

• Commissions or contract payments

• Personal Services Income (PSI)

• Any other income earned through your business activities

Allowable deductions may include:

• Business-related expenses (e.g., equipment, rent, utilities, professional services)

• Depreciation of assets

• Vehicle and travel expenses (if used for business)

• Home office deductions (if applicable)

Keeping detailed and accurate records is essential. The ATO requires you to retain receipts and invoices for all deductions claimed — ideally for at least five years.

4. GST Obligations and PAYG Instalments

If your business earns more than $75,000 a year, you must register for GST (Goods and Services Tax).Once registered, you’ll:

• Charge 10% GST on most goods and services sold

• Lodge Business Activity Statements (BAS), usually quarterly

• Claim GST credits on eligible purchases

You can also register voluntarily if it benefits your business cash flow.

Many sole traders also make PAYG instalments — advance payments toward your annual tax bill. This helps spread out tax costs and maintain steady cash flow. The instalment amount is based on your last return or current earnings, and can be adjusted anytime through myGov or the ATO Business Portal.

5. Record Keeping and Lodgement

As a sole trader, you must lodge an individual tax return each year, including your business income and deductions.You can do this:

• Online via myTax (through myGov)

• Through a registered tax agent

Ensure your records include:

• Business income and expense summaries

• Invoices, receipts, and bank statements

• Details of any PAYG or GST payments made

These documents make it easier to complete your return accurately and support your claims if reviewed by the ATO.

V. Essential Personal Income Tax Compliance

Understanding your core obligations is key to successfully managing your Personal Income Tax (PIT) in Australia. These rules apply to almost every individual taxpayer.

1. The Key Determinant of Your PIT Obligations

Your tax residency status is the most crucial factor determining how your income is taxed. Residency is a distinct concept from citizenship or immigration status.

• Resident for Tax Purposes: You are generally taxed on all income earned worldwide. You benefit from the $18,200 Tax-Free Threshold and lower progressive tax rates.

• Non-Resident for Tax Purposes: You are only taxed on income sourced in Australia. You do not receive the Tax-Free Threshold and are subject to higher starting tax rates.

2. The Medicare Levy & Other Levies

In addition to your primary Personal Income Tax (PIT), you may be liable for other mandatory government charges:

The mandatory 2% Medicare Levy is paid in addition to your PIT.

• The Medicare Levy (ML): This is a 2% levy on your taxable income, generally paid by Australian tax residents to fund the public health system.

• Medicare Levy Surcharge (MLS): An additional levy (1% to 1.5%) imposed on high-income earners who do not have an appropriate level of private hospital insurance. This encourages the use of private health care to reduce pressure on the public system.

3. Fundamental Record-Keeping and Audit Readiness

Regardless of your income source (employee or Sole Trader), the responsibility to maintain accurate records lies with you, the individual taxpayer.

• The Golden Rule: You must keep records to substantiate all income and all deductions claimed in your tax return.

• Retention Period: The ATO requires you to keep most records for five years from the date you lodge your return.

• Audit Readiness: Keeping detailed, organised records (whether digital or physical) ensures you can quickly verify your claims, minimizing ATO penalties and stress during an audit.

VI. Lodging Your Tax Return

Lodging an annual tax return with the ATO is a mandatory process for most individuals who earn income in Australia. This return reports your income and claims deductions/offsets to determine your final tax liability.

1. Tools from the ATO

The ATO provides digital resources to assist taxpayers in preparing and understanding their returns:

• Tax Tables: Official tables used to confirm the correct marginal tax rates, tax offsets, and withholding amounts.

• Individual Tax Calculator: An online tool that allows you to estimate your tax payable or refund amount based on your reported income and deductions before official lodgement.

2. How to Lodge

Taxpayers have three primary options for submitting their return:

1. myTax: The ATO’s free, secure online service. This is the fastest and most common method, with most income information (salary, bank interest) automatically pre-filled.

2. Registered Tax Agent: An agent prepares and lodges the return on your behalf. This is recommended for complex tax affairs and automatically grants you an extended lodging deadline.

3. Paper Form: This method is rarely used now and is typically reserved only for specific circumstances where online lodgement is not possible.

3. Key Dates and Late Lodgement Penalties

• Standard Deadline: The final date for self-lodgement is 31 October following the end of the financial year (30 June).

• Extended Deadline: If you use a registered tax agent, your deadline is automatically extended, often to the following May, provided you meet certain criteria.

• Late Lodgement Penalties: The ATO applies a Failure to Lodge (FTL) penalty if you miss the deadline without using an agent or notifying the ATO. This penalty increases with time.

4. What Happens After Lodging

Once your return is lodged, the ATO processes the information and issues a result:

• Notice of Assessment (NOA): This official document confirms the ATO's calculations based on your return.

• Refund: If the tax paid via PAYG withholding (or voluntary instalments) is greater than your final tax liability, the ATO will issue a refund.

• Tax Payable: If the tax paid is less than your final liability, you will have an amount of tax payable (a tax bill) which must be paid by the due date specified on the NOA.

VII. Conclusion

Mastering Personal Income Tax (PIT) starts with understanding the progressive tax brackets and the critical role of tax residency. Always factor in the mandatory Medicare Levy.

For those operating as Sole Traders, compliance requires knowledge of PSI rules and Small Business Concessions. You must keep meticulous records for five years and adhere strictly to the 31 October lodging deadline.

If facing complexity or needing to optimise compliance, contact Gordon Q.C Du & Associates. With over 20 years of experience, we are committed to providing reliable, expert tax advice.