Key Takeaway: From 1 July 2024, Australia's tax brackets changed significantly — the 37% bracket was raised, and the 32.5% rate dropped to 30%. The current structure has five brackets from 0% to 45%, plus the 2% Medicare Levy. Understanding marginal rates is the foundation of Australian tax planning.
The 2026 Australian Tax Brackets
Australian residents pay income tax based on marginal rates. Here are the brackets for the 2025–26 and 2026–27 financial years: Resident tax rates (2026–27): • $0 – $18,200: 0% (tax-free threshold) • $18,201 – $45,000: 16% • $45,001 – $135,000: 30% • $135,001 – $190,000: 37% • $190,001+: 45% Plus the 2% Medicare Levy on most income above $24,276 (with reductions for low-income earners and exemptions for certain groups). Note the change from prior years: The 32.5% bracket was reduced to 30%, and the 37% threshold was raised from $120,000 to $135,000. The 45% threshold was raised from $180,000 to $190,000. These changes are effective from 1 July 2024 and remain in place for 2026–27. What this means in practice: Most middle-income Australians pay less tax than under the old brackets, and the tax-free threshold of $18,200 means the first slice of income is not taxed at all.
How Marginal Tax Works
The most common misconception is that moving into a higher bracket means all your income gets taxed at the higher rate. This is wrong. Your income is divided into slices. Each slice is taxed at its own rate. Only the income that falls into a specific bracket is taxed at that bracket's rate. Example: A taxpayer earning $100,000/year Their tax calculation: • 0% on first $18,200 = $0 • 16% on $18,201 – $45,000 = $4,288 • 30% on $45,001 – $100,000 = $16,500 Total income tax = $20,788 Medicare Levy (2%) = $2,000 Total tax = $22,788 Take-home pay = $77,212 Their marginal tax rate is 30% (the bracket their last dollar falls in). Their effective tax rate is 22.8% — significantly lower than their marginal rate. This is why focusing on marginal rates for planning decisions and effective rates for understanding your real burden matters.
The Low Income Tax Offset (LITO)
Low-income Australians may qualify for the Low Income Tax Offset, which reduces their tax bill by up to $700. For 2026–27: • Income up to $37,500: $700 offset • $37,501 – $45,000: Offset phases out at 5 cents per dollar • $45,001 – $66,667: Offset continues phasing out at 1.5 cents per dollar • Above $66,667: No offset Example: A taxpayer earning $30,000 has $1,888 of tax (16% of $11,800) before offsets. With the full $700 LITO, their tax drops to $1,188 — an effective tax rate of 4%. Combined with the tax-free threshold, low-income earners pay very little tax in Australia.
The Medicare Levy: An Extra 2%
The Medicare Levy is a 2% tax on most income, on top of your income tax. It funds Australia's public health system. Key rules: • Full 2% applies above $24,276 (singles) or $40,966 (families) • Reduced rates apply between $24,276 and $30,345 (singles) • No Medicare Levy below $24,276 (singles) Medicare Levy Surcharge (MLS): Higher-income earners without private health insurance pay an additional 1–1.5% surcharge. For 2026–27: • Income $93,000–$108,000 (singles): +1% • Income $108,001–$144,000: +1.25% • Income above $144,000: +1.5% Buying private hospital cover often costs less than the surcharge — an important planning consideration for higher earners.
A Worked Tax Calculation
Let's calculate the full tax bill for three incomes, including Medicare Levy: Case 1: $60,000 salary Income tax: • $0 on first $18,200 • $4,288 on $18,201–$45,000 • $4,500 on $45,001–$60,000 (30% of $15,000) • Total income tax: $8,788 Medicare Levy: $1,200 LITO: $0 (phased out) Total tax: $9,988 Effective rate: 16.6% Case 2: $100,000 salary Income tax: • $0 on first $18,200 • $4,288 on $18,201–$45,000 • $16,500 on $45,001–$100,000 • Total income tax: $20,788 Medicare Levy: $2,000 Total tax: $22,788 Effective rate: 22.8% Case 3: $180,000 salary Income tax: • $0 on first $18,200 • $4,288 on $18,201–$45,000 • $27,000 on $45,001–$135,000 (30% of $90,000) • $16,650 on $135,001–$180,000 (37% of $45,000) • Total income tax: $47,938 Medicare Levy: $3,600 Total tax: $51,538 Effective rate: 28.6% Notice how the effective rate grows slower than the marginal rate. Even a $180,000 earner has an effective rate under 30% — despite their top dollar being taxed at 37%.
Five Legal Strategies to Reduce Tax
1. Salary sacrifice into super. Contributions are taxed at 15% inside super instead of your marginal rate (up to 47%). For a high earner, this saves 32 percentage points on every dollar contributed. Limit: $30,000/year concessional cap. 2. Claim all work-related deductions. Home office expenses, tools, professional subscriptions, union fees, work-related travel, self-education — all may be deductible. Keep receipts and log your home office hours. 3. Negative gearing on investment property. Property losses can offset your salary income. See our dedicated negative gearing guide. 4. Buy private health insurance. Avoid the Medicare Levy Surcharge (1–1.5%) if you earn above $93,000. Often cheaper than the surcharge itself. 5. Contribute to a spouse's super. If your spouse earns under $37,000, contributing to their super can trigger a tax offset of up to $540. Higher earners have additional options: • Division 293 tax planning. If you earn above $250,000, super contributions may be taxed at 30% instead of 15%. Plan contributions accordingly. • Family trust distributions. If you have a business or investment income, distributing to lower-income family members can reduce total household tax.
Frequently Asked Questions
What is the tax-free threshold?
$18,200 per year for Australian residents. The first $18,200 of income isn't taxed at all. If you earn less than this, you generally don't need to lodge a tax return (unless tax was withheld). Non-residents don't get the tax-free threshold.
How much tax will I pay on $100,000?
Approximately $22,788 including the Medicare Levy (assuming no deductions or offsets). Effective tax rate: 22.8%. This is $20,788 in income tax plus $2,000 in Medicare Levy. Additional offsets (LITO) don't apply at this income level.
Does Australia have a flat tax rate?
No — it uses marginal rates. The tax system is progressive: higher income is taxed at higher rates. The five brackets range from 0% to 45%, plus the 2% Medicare Levy. This is designed to distribute the tax burden based on ability to pay.
What is the difference between marginal and effective tax rate?
Marginal rate is the tax on your next dollar; effective rate is your total tax divided by total income. A $100,000 earner has a 30% marginal rate (plus Medicare) and a 22.8% effective rate. For planning decisions (e.g., salary sacrifice), use marginal; for understanding your true burden, use effective.
Are tax brackets likely to change again?
Yes, eventually. Tax brackets are adjusted periodically — typically every 3–7 years. The 2024 changes were the largest in a decade. Future changes may adjust thresholds for inflation or restructure rates entirely. Plan around current brackets but monitor legislative changes.
How does the Medicare Levy Surcharge work?
It's an extra tax for high earners without private hospital cover. Above $93,000 (singles) or $186,000 (families), you pay an additional 1–1.5% on top of the Medicare Levy. Buying private hospital insurance typically costs less than the surcharge, making it a financial no-brainer for high earners.
Do I pay tax on superannuation withdrawals?
No, if you're over 60 and meet the preservation age conditions. Super withdrawals after 60 are completely tax-free, regardless of amount. Between preservation age (60) and 65, you may need to meet a condition of release (e.g., retirement). Before 60, withdrawals are taxed and may trigger penalties.
How do tax offsets differ from deductions?
Deductions reduce taxable income; offsets reduce tax directly. A $1,000 deduction at a 30% marginal rate saves $300. A $1,000 offset saves $1,000. Offsets are always more valuable. Common offsets: LITO, Private Health Insurance Rebate, Seniors and Pensioners Tax Offset.
Bottom Line
The 2026–27 Australian tax system has five brackets from 0% to 45%, plus the 2% Medicare Levy. The 2024 changes reduced the middle bracket from 32.5% to 30% and raised the top two thresholds, providing meaningful tax relief for middle and higher earners. Effective tax rates are significantly lower than marginal rates — even $180,000 earners have an effective rate under 30%. Use the structure to your advantage: salary sacrifice into super (15% tax vs up to 47%), claim all work-related deductions, use negative gearing if appropriate, and buy private health insurance to avoid the Medicare Levy Surcharge. Understand the difference between marginal and effective rates — it changes how you plan.