Definition
Income tax is a direct tax levied by the government on the taxable income earned by individuals, companies, trusts, and other entities during a financial year. In Australia, income tax is administered by the Australian Taxation Office (ATO) and is the federal government’s largest single source of revenue.
Income Tax Rates for Individuals in Australia
For individuals, taxable income is calculated by taking total assessable income (wages, investment income, business income, and other earnings) and subtracting allowable deductions. The resulting figure is taxed at progressive rates that increase as income rises. As of FY2025, rates range from 0% for income up to $18,200 to 45% for income above $180,000, plus the Medicare Levy of 2%.
Company Income Tax Rates
For companies, income tax applies at a flat rate. The standard company tax rate in Australia is 30%. Small businesses with a turnover below $50 million that derive at least 80% of their income from business activities qualify for the lower rate of 25%.
PAYG Withholding and PAYG Instalments
Pay As You Go (PAYG) withholding is the mechanism through which employers deduct income tax from employee wages each pay cycle and remit it directly to the ATO. Employees then lodge an individual tax return after 30 June to reconcile their actual tax liability against the amounts already withheld.
PAYG Instalment is a separate system for businesses and investors who earn income not subject to withholding. The ATO calculates estimated instalment amounts and requires quarterly payments, which are then credited against the final tax liability when the annual return is lodged.
Tax Planning vs Tax Avoidance
Tax planning is a legitimate activity: structuring business and personal finances to minimise tax within the bounds of the law. This includes making concessional superannuation contributions, timing the realisation of capital gains, and choosing the right business structure. Tax avoidance (using artificial arrangements to avoid tax obligations) is different and can attract ATO penalties.