Income Tax for Individuals: Complete Guide

What Is Income Tax?

Income tax is a tax on money you earn. It’s Australia’s main source of government revenue, funding schools, hospitals, defence, infrastructure, and social security.

Key facts:

• Progressive tax system (higher income = higher tax rate)
• Tax year runs July 1 to June 30
• Must lodge tax return if you earn above threshold
• Employers withhold tax during the year
• You pay the difference when you lodge return

Who Must Pay Tax?

You must pay tax if:

• You’re an Australian resident for tax purposes
• You earn income while in Australia
• You have foreign income (if Australian resident)

Australian resident for tax purposes means:

• Australian citizen, or
• Permanent resident, or
• Living in Australia continuously, or
• Ordinarily resident in Australia

Tax Rates for 2023-24

Individual Tax Rates

Taxable Income	Tax Rate
$0 - $18,200	Nil (tax-free threshold)
$18,201 - $45,000	19%
$45,001 - $120,000	32.5%
$120,001 - $180,000	37%
Over $180,000	45%
	Plus Medicare Levy 2%

Medicare Levy:

• Additional 2% on taxable income (main rule)
• Exceptions for low-income earners
• Can’t claim back if you don’t pay it

Temporary Budget Repair Levy:

• Additional 2% on income over $180,000
• Applies until June 30, 2017 (currently scheduled to end)

What’s Considered Taxable Income?

Income sources that are taxable:

• Salary and wages from employment
• Business profits (net of expenses)
• Investment income (dividends, interest, distributions)
• Rental income (net of expenses)
• Capital gains (from sale of investments)
• Superannuation income
• Government allowances and payments
• Prizes and awards above certain amounts
• Gift card and voucher income

Income that’s NOT taxable:

• First $18,200 (tax-free threshold)
• Most government welfare payments (though noted on assessment)
• Some compensation payments
• Personal injury damages
• Gifts and inheritances
• Some insurance payouts

What You Can Deduct

Key principle: A deduction is allowed if the expense is directly connected to earning your income and not private in nature.

Common Deductions

Work-Related Expenses

• Uniforms (and dry cleaning)
• Work-related tools and equipment
• Protective equipment
• Professional fees and memberships
• Work-related training and education
• Laundry (work uniforms/clothes)
• Car expenses (if work-related travel)
• Home office expenses (percentage of home running costs)

Self-Employed Expenses

• Office supplies
• Equipment and tools
• Motor vehicle expenses
• Rental of premises
• Wages and salaries
• Superannuation contributions
• Marketing and advertising
• Insurance (business and professional indemnity)
• Travel for business purposes
• Professional development

Investment Expenses

• Interest on money borrowed to invest
• Fees to manage investments
• Costs of annual report, dividend statements
• Professional advice on investments
• Tax depreciation on rental property

Medical Expenses

• Limited deductions (mostly not deductible)
• Can claim some private health insurance costs
• Can claim some disability support expenses

Deductions NOT Allowed

• Private or personal expenses
• Capital expenditure (purchase of assets — use depreciation instead)
• Fines and penalties
• Private life insurance
• Gifts and donations (unless registered charity — separate offset)
• Costs of acquiring income source (e.g., registration for business)
• Overtime meals and entertainment
• Home expenses (unless home-based business with specific allowance)

Work-Related Car Expenses

You can claim car expenses if you travel for work (not commuting to regular workplace).

Two Methods

Simplified Method (Cents per km)

• Deduct fixed amount per km at ATO rate (currently 67 cents)
• Need to record km traveled for work only
• Easier but may be less generous than actual method
• Don’t need to keep receipts for fuel/servicing

Actual Method

• Calculate percentage of total running costs related to work
• Keep receipts for all expenses (fuel, maintenance, repairs, registration, insurance)
• More complex but may give larger deduction
• Depreciation can also be claimed

Calculate as:

• Total work kilometers ÷ Total kilometers × Total running costs = Deductible amount

Example:

• You drive 40,000 km in year
• 8,000 km is work-related
• Total running costs: $8,000
• Deductible amount: (8,000 ÷ 40,000) × $8,000 = $1,600

Home Office Deductions

If you work from home, you can claim expenses, but it must be genuine work space.

Simplified Method

• Fixed rate: currently $20 per week (for 2023-24)
• Must have dedicated workspace
• Multiply by number of weeks worked from home
• Simplest approach

Actual Method

• Calculate your home’s running costs: rent/mortgage interest, utilities, rates, insurance, repairs
• Estimate percentage of home used for work
• Claim that percentage

Example:

• Home running costs: $6,000/year
• 10% used for office = $600 deductible
• Or simplified: $20/week × 52 weeks = $1,040

Tax Offsets

Tax offsets are deductions from tax payable (not from taxable income). They’re worth more than tax deductions.

Main Offsets

Low Income Tax Offset

• Up to $705 for 2023-24
• Phases out above $37,500 income
• Helps low-income earners

Medicare Levy Surcharge

• Applies if high earners don’t have private health insurance
• Works as offset if you qualify

Franking Credits

• Attached to dividends from Australian companies
• Can offset tax payable
• Excess may be refundable

Other Offsets

• Spouse tax offset (low income spouse)
• Gift tax offset (charitable donations)
• Various industry-specific offsets

Capital Gains Tax

Selling assets may trigger capital gains tax.

Capital gain = Sale price - Cost base - Deductible costs

Capital Gains Tax Concessions

• 50% discount if held 12+ months (individuals)
• Applies to most investment assets
• Increases effective tax rate but allows some gain tax-free

Example:

• Buy shares for $10,000
• Sell for $16,000 (after 2+ years)
• Capital gain: $6,000
• CGT discount: 50% = $3,000 taxable gain
• Tax at 37% = $1,110 tax (vs $2,220 without discount)

Superannuation and Tax

Contributions to superannuation receive favorable tax treatment.

Concessional Contributions

• Employer contributions: taxed at 15% (vs your marginal rate)
• Personal contributions: may be tax deductible
• Annual cap: $27,500 (2023-24)
• Excess contributions attract penalty tax

Non-Concessional Contributions

• Personal after-tax contributions
• No tax deduction
• Annual cap: $110,000 (2023-24)
• No tax on investment growth in super (15%)

Lodging Your Tax Return

Timeline

• Tax year ends: June 30
• Typically must lodge by: October 31 (extends if using tax agent — May 31)
• Electronic lodgement required if you have tax agent

What You Need

• PAYG payment summaries (from employers)
• Interest statements (banks)
• Dividend statements
• Deduction records (receipts, invoices)
• Tax file number (TFN)

Three Ways to Lodge

1. Online with ATO (myTax)

• Free if income mostly from employment
• Usually takes 2 minutes
• Instant processing
• Can lodge within minutes

2. With Tax Agent

• Recommended if complex income/deductions
• Can cost $200-500+ depending on complexity
• Agent handles all correspondence
• Extended lodgement date (May 31)

3. Paper Form

• Old-fashioned and slow
• Not recommended
• Takes weeks to process

Tax Planning Strategies

Before Year-End

Reduce Taxable Income

• Make superannuation contributions (up to cap)
• Prepay expenses where possible
• Salary sacrifice arrangements
• Negative gearing losses

Make Use of Deductions

• Catch up work-related expenses
• Buy professional development
• Equipment needed for work
• Vehicle servicing

Manage Investment Income

• Realize capital losses to offset gains
• Distribute investment income appropriately
• Consider franking credits

Ongoing Strategies

• Keep good records (7 years)
• Track all deductible expenses
• Regularly review superannuation strategy
• Consider income splitting through trusts/companies
• Invest with tax efficiency in mind

Common Tax Mistakes

Claiming without records

• Must have receipts for deductions
• Diary or logbook not enough for most expenses

Over-claiming home office

• Can’t claim full home expenses if only part-time work from home
• ATO watches this area closely

Mixing personal and work expenses

• Can’t claim private car use as work
• Can’t claim private health insurance

Not keeping investment records

• Need to track cost base for capital gains tax
• ATO requires documentation

Forgetting small items

• All deductions add up
• Track subscriptions, training, small tools

When to Get Professional Help

Tax agent recommended if:

• Self-employed or own business
• Complex investment income
• Multiple income sources
• Significant deductions
• Previous tax complications
• Inheritance or capital gains
• Unsure about tax obligations

Cost: Usually $200-500 per year, often worth it for tax savings and peace of mind

Key Takeaway

Australian income tax is based on a progressive system where higher earners pay higher rates. Understanding what’s deductible and what offsets apply can legitimately reduce your tax. Keep good records, lodge on time, and seek professional help if your situation is complex.

Further Reading

• ATO Website: www.ato.gov.au (comprehensive guides, calculators, forms)
• myTax: Online lodgement system
• Tax Agent Locator: Find a qualified tax agent
• Community Legal Centers: Free tax advice for low-income earners