How Income Tax Is Calculated in Australia: the 2026-27 Tax Brackets Explained

A common misunderstanding is that moving into a higher bracket taxes all of your income at that higher rate. That is not how it works. Each rate applies only to the part of your income that falls inside that bracket. If your taxable income is 60,000 dollars, the first 18,200 dollars is not taxed, the part from 18,201 to 45,000 dollars is taxed at 15 percent, and only the part from 45,001 to 60,000 dollars is taxed at 30 percent. This is why your average rate, the tax you pay as a share of your whole income, is always lower than the top rate that applies to your last dollar. The rate on your last dollar is your marginal rate. The tax as a share of your total income is your effective, or average, rate.

For the 2026 to 2027 year the rate on the second bracket, income from 18,201 to 45,000 dollars, is 15 percent. It was 16 percent in 2025 to 2026. This is part of a legislated set of cuts. The first step, from 1 July 2024, lowered the old 19 percent rate to 16 percent and the old 32.5 percent rate to 30 percent. The current step, from 1 July 2026, lowered 16 percent to 15 percent. A further step is already legislated: from 1 July 2027 the rate on that bracket falls again to 14 percent. The move to 15 percent, and then 14 percent, was legislated by the Treasury Laws Amendment (More Cost of Living Relief) Act 2025. The bracket thresholds are unchanged. For someone earning 45,000 dollars or more, the 2026 to 2027 rate cut is worth up to 268 dollars a year compared with 2025 to 2026.

Most residents also pay the Medicare levy, which is 2 percent of taxable income and funds the public health system. It sits on top of income tax rather than replacing part of it. A reduction applies for low income earners. For a single person with no dependants, no levy applies where taxable income is 28,011 dollars or less, a reduced levy applies between 28,011 and 35,013 dollars, and the full 2 percent applies above 35,013 dollars. These are the latest published figures, for 2025 to 2026, and different thresholds apply to families and to seniors and pensioners. A separate charge, the Medicare levy surcharge, can apply to higher income earners who do not hold an appropriate level of private hospital cover.

The Low Income Tax Offset, or LITO, reduces the tax of low and middle income earners. It is worth up to 700 dollars for taxable income up to 37,500 dollars. Above that it reduces by 5 cents for each dollar from 37,501 to 45,000 dollars, which brings it down to 325 dollars, then by 1.5 cents for each dollar from 45,001 to 66,667 dollars, at which point it reaches nil. LITO is applied automatically when you lodge, so you do not claim it separately. It is a non refundable offset, which means it can reduce your income tax to zero but does not create a refund on its own, and it cannot reduce the Medicare levy.

Example only. A resident with a taxable income of 90,000 dollars in 2026 to 2027. Step 1, income tax from the brackets: 4,020 dollars for the income up to 45,000 dollars, plus 30 percent of the 45,000 dollars above that, which is 13,500 dollars. Income tax is 17,520 dollars. Step 2, LITO: income is above 66,667 dollars, so LITO is nil here. Step 3, Medicare levy: 2 percent of 90,000 dollars is 1,800 dollars. Total: 17,520 dollars plus 1,800 dollars is 19,320 dollars.

Example only. A resident with a taxable income of 50,000 dollars. Income tax is 4,020 dollars plus 30 percent of 5,000 dollars, which is 5,520 dollars. LITO is 325 dollars minus 1.5 cents for each dollar above 45,000 dollars, which is 325 dollars minus 75 dollars, so 250 dollars. Tax after LITO is 5,270 dollars. The Medicare levy is 2 percent of 50,000 dollars, which is 1,000 dollars. The total is 6,270 dollars. These are examples only. Use the Income Tax Calculator for your own figures.

Your tax is worked out on your taxable income, which is your assessable income minus the deductions you are entitled to claim. Assessable income includes wages, most investment income such as interest, dividends and rent, and business income. Deductions reduce that figure before the rates are applied, so two people on the same salary can have different taxable incomes. Salary sacrificed super, for example, is taken out before tax and reduces assessable income.

If I move into a higher bracket, is all my income taxed at that rate?

No. Only the part of your income inside each bracket is taxed at that bracket's rate. The rest is taxed at the lower rates.

What is the tax free threshold for 2026 to 2027?

18,200 dollars. Income up to that amount is not taxed for residents entitled to the full threshold.

What is the difference between my marginal rate and my effective rate?

Your marginal rate is the rate on your last dollar of income. Your effective, or average, rate is your total tax as a share of your whole income, and it is lower.

Does the Medicare levy come out of the brackets?

No. It is a separate 2 percent on taxable income, on top of the income tax from the brackets, with a reduction for low income earners.

What is changing after 2026 to 2027?

From 1 July 2027 the rate on the 18,201 to 45,000 dollar bracket falls from 15 percent to 14 percent. The thresholds stay the same.

Do foreign residents get the tax free threshold?

No. Foreign residents for tax purposes do not receive the tax free threshold or LITO and are taxed from the first dollar, and they do not pay the Medicare levy.