The tax system in three parts
Almost every working Australian's experience of tax comes down to three things: a Tax File Number that identifies you to the ATO, tax withheld from your pay throughout the year, and an annual tax return that reconciles what was withheld against what you actually owed. Beyond that, several separate taxes, income tax, the Medicare Levy, capital gains tax, GST and HECS-HELP, apply depending on your situation. This guide is an orientation to how they all connect, with a dedicated guide for each one linked throughout.
Your Tax File Number (TFN)
A TFN is a unique number the ATO uses to track your tax and superannuation. You apply for one free through the ATO, ideally before starting your first job. When you start work, you complete a TFN declaration with your employer, which is also where you claim the tax-free threshold (only from one employer at a time).
Working without providing a TFN is expensive: your employer must withhold tax at the top marginal rate on everything you earn, rather than the normal progressive rates. This is corrected at tax return time, but it means significantly less in every pay packet until then.
How tax is collected during the year: PAYG
Most employees never pay tax directly, it is withheld from every pay under the Pay As You Go (PAYG) system, based on ATO withholding tables and your TFN declaration. This is designed to roughly match what you will actually owe for the year, though bonuses, overtime, and a second job can cause withholding to run ahead of or behind your real annual liability. The income tax guide covers exactly how the brackets work, with a full worked example.
The annual tax return
The Australian financial year runs from 1 July to 30 June. After 30 June, you lodge a tax return declaring your full year's income and any deductions, most individuals do this online through myGov (using the myTax tool) or through a registered tax agent.
The standard deadline for self-lodgment is 31 October. Using a registered tax agent generally extends this, provided you are registered with them before 31 October. The ATO then compares what you actually owed for the year against what was withheld through PAYG: if too much was withheld, you receive a refund; if too little, you receive a bill for the difference.
The taxes that apply to most Australians
| Tax | Applies to | In brief |
|---|---|---|
| Income tax | Almost everyone who earns income | Progressive rates from 0% to 45% across five brackets |
| Medicare Levy | Most residents | 2% of taxable income, funds Medicare; a surcharge can apply above an income threshold without private hospital cover |
| Capital gains tax (CGT) | Anyone selling shares, property or other assets for a gain | Added to taxable income; a 50% discount applies for assets held over 12 months |
| GST | Everyone, as a consumer | 10%, already included in the price of most goods and services |
| HECS-HELP | Anyone with a study loan above the repayment income threshold | An extra compulsory repayment collected through the tax system, not interest-bearing in the traditional sense |
GST, in a bit more depth
The Goods and Services Tax is a broad-based 10% tax on most goods and services sold in Australia. Unlike a US-style sales tax, GST is built into the displayed price, the number on the shelf or the invoice already includes it, so there is nothing extra calculated at the checkout.
Some categories are GST-free, most basic food, many health and medical services, and education courses among them. Businesses with turnover above the ATO's registration threshold must register for GST, charge it on their sales, and remit it to the ATO (net of GST paid on their own business purchases) via a Business Activity Statement (BAS), usually lodged quarterly. As an employee or consumer, none of this registration or reporting applies to you, GST is simply part of the price you pay.
Reducing what you owe, legitimately
A few strategies show up repeatedly in Australian tax planning:
- Salary sacrifice into super: redirects pre-tax income into superannuation, taxed at 15% rather than your marginal rate. Covered in full in the salary sacrifice guide.
- Genuine work-related deductions: expenses directly connected to earning your income, supported by records and not already reimbursed.
- Timing asset sales for the CGT discount: holding an asset past the 12-month mark before selling halves the taxable portion of any gain.
A common misconception worth clearing up here: a pay rise can never leave you worse off after tax in Australia's progressive system, higher rates only ever apply to the portion of income above each threshold. The income tax guide walks through a full worked example of why.
Where to go deeper
- Income tax - full bracket table, worked example, PAYG and refunds
- Medicare Levy - the levy, the surcharge, and private hospital cover
- Capital gains tax - the 12-month discount, cost base, and worked examples
- HECS-HELP - repayment thresholds and how the loan actually works
Frequently asked questions
What happens if I work without a Tax File Number?
Your employer must withhold tax from your pay at the top marginal rate, currently 45% plus the Medicare Levy, regardless of how much you actually earn. This is a strong incentive to apply for a TFN, free through the ATO, before starting work. Any excess withheld is refunded once you lodge a return using a valid TFN.
Do I have to lodge a tax return every year?
Most people who earned income during the financial year need to lodge, even if tax was already withheld correctly and no further payment is owed. Some people with very low or no income can lodge a 'non-lodgment advice' instead. The ATO's individual lodgment tool or a registered tax agent can confirm what applies to your situation.
Is GST the same as income tax?
No, they are entirely separate taxes. Income tax is charged on what you earn, GST is a 10% tax embedded in the price of most goods and services you buy, collected by the seller and passed to the ATO. As an employee, you generally interact with income tax through your pay and tax return, and with GST simply as a consumer, it is already included in the price you see.
What is the difference between a tax deduction and a tax offset?
A deduction reduces your taxable income before tax is calculated, so its value depends on your marginal rate (a $1,000 deduction saves $300 in tax at a 30% marginal rate). An offset (like the Low Income Tax Offset) directly reduces the tax you owe, dollar for dollar, after tax has been calculated on your full taxable income.
When is the tax return deadline?
The Australian financial year runs from 1 July to 30 June. If you lodge your own return, the standard deadline is 31 October following the end of the financial year. Lodging through a registered tax agent generally extends this deadline, provided you engage them before 31 October.
Official sources
- Australian Taxation Office - individual tax returns, TFN, and lodgment
- Australian Taxation Office - GST - registration thresholds, GST-free items, and BAS
Calculate your own position
Use the Income Tax Calculator for your take-home pay and Medicare Levy, the Capital Gains Tax Calculator for a sale, or the GST Calculator to add or remove GST from a price.