Where the tax actually goes

Income tax is worked out in slices

Australian personal income tax is not one rate applied to everything you earn. The rate scale divides your taxable income into bands, and each band carries its own rate. That rate applies only to the part of your income that sits inside that band.

This is the part of the system that is most often described the other way around. Crossing into a higher band does not lift the rate on everything underneath. When your income passes a threshold, the higher rate reaches the dollars above that line, and only those dollars. Everything below stays taxed at the rate of the band it sits in.

The tax-free threshold is the first slice. On the resident scale it is taxed at nil, and it stays at nil no matter how much income sits above it. A person in the top band still has that first slice taxed at nothing.

The resident rate scale for 2026-27

These are the rates the Australian Taxation Office publishes for Australian residents for the 2026-27 income year, checked on 1 August 2026:

$0 to $18,200 — nil

$18,201 to $45,000 — 15c for each $1 over $18,200

$45,001 to $135,000 — $4,020 plus 30c for each $1 over $45,000

$135,001 to $190,000 — $31,020 plus 37c for each $1 over $135,000

$190,001 and over — $51,370 plus 45c for each $1 over $190,000

The fixed amounts in that table are the slices below, already added together. There are $26,800 between $18,200 and $45,000, and 15c on each of those dollars comes to $4,020, which is why $4,020 is the starting figure in the next line. There are $90,000 between $45,000 and $135,000, and 30c on each of those comes to $27,000, which added to $4,020 gives the $31,020 in the line after that. The table is not a set of separate rules. It is one calculation, written out at each step so you do not have to add the earlier slices yourself.

Two things about those figures. They apply to residents, and they apply to the 2026-27 income year. Rate scales and thresholds are changed by legislation, so the date attached to a number matters as much as the number itself. That is why the check date is written next to the table rather than left out.

Marginal rate and effective rate

Your marginal rate is the rate that applies to your next dollar of income. It is the rate of the band your income currently reaches into.

Your effective rate is the whole amount of tax divided by the whole amount of income. It is a single figure describing the result, not a rate that appears anywhere in the legislation.

Take a taxable income of $90,000 for 2026-27. That falls in the third band, so the calculation is $4,020 plus 30c for each dollar above $45,000. There are $45,000 above that threshold, and 30c on each of those is $13,500. Added to $4,020, the tax on the rate scale comes to $17,520. As a share of the $90,000, that is 19.5 per cent, rounded.

So the same income has a marginal rate of 30c in the dollar and an effective rate of a little under 20c. Both numbers are accurate, and they answer different questions. The marginal rate describes the next dollar. The effective rate describes all the dollars together. They differ because the slices underneath were taxed at 15c, or at nothing at all. As income rises, the effective rate climbs towards the marginal rate without reaching it, because the lower slices are still in there being taxed at lower rates.

Withholding through the year

Most people do not hand over their income tax in one payment at the end of the year. An employer takes an amount out of each pay and sends it to the Tax Office. This is pay as you go withholding, usually shortened to PAYG withholding.

The amount taken out is worked out from withholding schedules the Tax Office publishes, applied to the pay for that period. The schedule treats that period as though the same pay continued for the full year, and takes account of whether you have claimed the tax-free threshold with that employer.

Withholding is not the tax itself. It is an amount held against the tax, in advance of the tax being worked out. Each dollar withheld from your pay is reported to the Tax Office under your name and sits there as a credit.

Where a refund or a bill comes from

After 30 June, the income for the year is added up and the tax on it is worked out once, on the year as a whole. The tax return is where that total is assembled. The notice of assessment that comes back sets out the tax on the year's income, the amounts already withheld against it, and the difference between the two.

If more was withheld across the year than the assessment came to, the difference is refunded. If less was withheld, the difference is payable. It is the same subtraction either way, landing on one side of zero or the other. A refund is the part of the withheld amount that the finished assessment did not call for.

The two figures come apart because withholding is calculated pay by pay while the assessment is calculated on the year. Some of the ordinary reasons for a gap:

pay that changed during the year, so a period's withholding reflected a level of income that did not hold for twelve months

more than one employer at the same time, each applying the schedule to its own payments

part of the year without work, so the nil band was only partly used

income with nothing withheld from it, such as interest paid on a bank account

payments with their own withholding rules, such as bonuses or unused leave paid out

The Medicare levy sits beside the rate scale

The Medicare levy is a separate component. The Tax Office describes it as an amount paid in addition to the tax on your taxable income, calculated as a percentage of that income under its own rules, with reductions and exemptions that turn on income levels and on individual circumstances. The rate and those thresholds are published by the Tax Office and are altered from time to time, which is why no figure for the levy appears here.

On a notice of assessment the levy shows up on its own line, separate from the tax calculated on the rate scale. The withholding schedules take it into account, which is one reason the amount coming out of a pay is not a plain application of the rate scale to that pay.

The rate scale, and the levy beside it, are only part of an assessment. Deductions, offsets and study loan repayments are each worked out under their own rules and are not described here. What is described here is the shape of the arithmetic underneath: income cut into slices, each slice taxed at its own rate, the total compared against what was already withheld, and the difference settled once a year.

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