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Module 3 · L8 of 14 ~55 min MS-F1 ⚡ +90 XP available

Calculating Income Tax

Australia uses a progressive tax system — the more you earn, the higher the rate you pay on each extra dollar. But only the income in each bracket gets taxed at that bracket's rate, not your entire income. If you earn $90,000, you are NOT paying 32.5% on all of it.

Today's hook — If you earn $90,000, are you paying 32.5% tax on the whole amount? Or only on the part above $45,000? Think about what progressive means before we start.

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Worksheets

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Three printable worksheets that build from foundations to mastery — or build your own from any module’s questions.

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Recall — your gut answer first

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Australia uses a progressive tax system — the more you earn, the higher the rate you pay on each extra dollar. But here's the key word: progressive means only the income in each bracket gets taxed at that bracket's rate, not your entire income.

Before we apply any numbers — think about what that actually means in dollars, and why a government might design a tax system this way rather than charging everyone the same flat percentage.

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The key relationships you need to own

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Four formulas drive every income tax calculation. The most important skill is choosing the right bracket and applying it correctly.

$$\text{Income tax} = \text{Base amount} + \text{Marginal rate} \times (\text{Taxable income} - \text{Threshold})$$

$$\text{Medicare levy} = \text{Taxable income} \times 0.02$$

$$\text{Total tax liability} = \text{Income tax} + \text{Medicare levy}$$

$$\text{Refund} = \text{PAYG withheld} - \text{Total tax liability} \quad (\text{when PAYG} > \text{liability})$$

Debt = Total tax liability − PAYG withheld (when liability > PAYG)

Marginal rate — only on the excess

The marginal rate applies ONLY to income above the bracket threshold. A $70,000 income: 32.5% applies only to the $25,000 above $45,000, not to the full $70,000.

Medicare levy — on taxable income

Medicare levy = 2% of taxable income (not of income tax). For $70,000: Medicare = $70,000 × 0.02 = $1,400 — not $13,217 × 0.02.

6-step strategy

1. Find bracket. 2. Write base amount. 3. Subtract threshold from income. 4. Apply marginal rate. 5. Add base. 6. Add Medicare levy separately.

What you'll master

Know

Key facts

The 2024–25 Australian income tax brackets and how to read them
That Medicare levy = 2% of taxable income, added separately
The formulas for tax refund and tax debt

Understand

Concepts

Why the marginal rate applies only to income above the bracket threshold
Why effective tax rate is always lower than the marginal rate
How PAYG withholding is reconciled against actual tax liability at year end

Can do

Skills

Calculate income tax from a tax table for any taxable income
Add Medicare levy to find total tax liability
Determine whether a worker receives a refund or owes a debt, and by how much

Key terms

Progressive TaxA tax system where higher income earners pay a higher percentage of their income in tax.

Marginal Tax RateThe rate of tax applied to the last dollar earned within a particular tax bracket.

Tax BracketA range of income that is taxed at a particular rate.

Tax PayableThe total amount of income tax owed to the government before offsets.

Medicare LevyAn additional 2% charge on taxable income that funds Australia's universal health system.

Effective Tax RateTotal tax liability divided by taxable income — always lower than the marginal rate in a progressive system.

How progressive tax brackets work

core concept

In a progressive tax system, each portion of income is taxed at a different rate — higher rates apply only to the income within that bracket, not to total income.

The 2024–25 Australian income tax brackets for residents:

$0 – $18,200: 0% (nil)
$18,201 – $45,000: 19c for each $1 over $18,200 (base: $0)
$45,001 – $120,000: $5,092 + 32.5c for each $1 over $45,000
$120,001 – $180,000: $29,467 + 37c for each $1 over $120,000
$180,001+: $51,667 + 45c for each $1 over $180,000

Always use taxable income, not gross income: The tax table is applied to taxable income (after deductions). Using gross income gives a higher — and incorrect — tax figure.

Medicare levy is 2% of taxable income — not of tax payable: For a $70,000 income: correct Medicare = $70,000 × 0.02 = $1,400. Incorrect = $13,217 × 0.02 = $264. A very different result.

What to write in your book

Always write the bracket before substituting: "$84,000 is in the $45,001–$120,000 bracket."
Income tax = Base amount + marginal rate × (taxable income − threshold).
Medicare levy = taxable income × 0.02 (separate step, added to income tax).
Total liability = income tax + Medicare levy. Then compare to PAYG withheld.

Quick check: What is the Medicare levy on a taxable income of $45,000?

Tax refund or tax debt — reconciling PAYG

core concept

At the end of each financial year, Australians lodge a tax return comparing what was withheld by their employer against what they actually owe — the difference is either a refund or a debt.

Compare PAYG to total tax liability, not income tax alone: The comparison is always: PAYG withheld vs total tax liability (income tax + Medicare levy combined). Forgetting to include the Medicare levy before comparing understates the liability.

What to write in your book

Refund = PAYG − Total liability (when PAYG > liability).
Debt = Total liability − PAYG (when liability > PAYG).
Always write a conclusion: "Tax refund of $X" or "Tax debt of $X".
Check effective rate = total tax ÷ taxable income. Should be 20–30% for incomes $60k–$100k.

True or false: If PAYG withheld ($14,000) is less than total tax liability ($15,200), the taxpayer receives a refund of $1,200.

Worked examples · 4 in a row, reveal as you go

PROBLEM 1 · FULL TAX CALCULATION — REFUND

Zara has a taxable income of $67,500 for the 2024–25 financial year. Her employer withheld $14,980 in PAYG tax. Calculate: (a) income tax payable, (b) Medicare levy, (c) total tax liability, and (d) whether she receives a refund or owes a debt, and by how much.

$\$67{,}500$ falls in the $\$45{,}001$–$\$120{,}000$ bracket

Identify the correct bracket from the tax table — write this line first.

PROBLEM 2 · TAX DEBT OUTCOME

Marcus has a taxable income of $112,000. His PAYG withheld for the year was $28,100. Calculate his total tax liability and determine whether he has a refund or debt.

$\$112{,}000$ falls in the $\$45{,}001$–$\$120{,}000$ bracket

Identify the correct bracket.

PROBLEM 3 · FULL QUESTION — INCOME TO REFUND/DEBT

Priya earns $82,600 salary and $1,200 in bank interest. Her allowable deductions total $2,850. Her PAYG withheld was $19,400. Calculate her tax refund or debt.

$\text{Gross income} = \$82{,}600 + \$1{,}200 = \$83{,}800$

Sum all assessable income.

PROBLEM 4 · BRACKET BOUNDARY CHECK

Ella has a taxable income of $45,000 exactly. Her PAYG withheld for the year was $5,900. Calculate her income tax, Medicare levy, total tax liability, and whether she receives a refund or owes a debt.

$\$45{,}000$ is at the top of the $\$18{,}201$–$\$45{,}000$ bracket

Use the 19c per dollar over $18,200 rule.

What to write in your book

Step 1 is ALWAYS writing the bracket: "$X is in the $45,001–$120,000 bracket."
Medicare levy = taxable income × 0.02 (not income tax × 0.02).
Write the final answer as "Refund of $X" or "Tax debt of $X" — not just a number.

Fill the gap: A taxpayer has taxable income of $60,000. Income tax (bracket) = $5,092 + 0.325 × ($60,000 − $45,000) = $.

Match each taxable income to the correct bracket.

Revisit your thinking

Look back at what you wrote in the Think First section. Progressive tax means that earning $90,000 puts you in the $45,001–$120,000 bracket, but the 32.5% rate applies only to the $45,000 above the threshold — not to the full $90,000. Governments use progressive systems because they place a larger burden on those with greater ability to pay.

What has changed? What did you get right? What surprised you?

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Top 3 list: Name THREE things you must do correctly to get the right tax refund/debt answer in an HSC question.

Multiple choice

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Pick your answer, then rate your confidence — that tells the system what to drill next.

Short answer

ApplyBand 32 marks

SA 1. A taxpayer has taxable income of $60,000. Calculate their income tax payable before Medicare levy. (2 marks)

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ApplyBand 33 marks

SA 2. A taxpayer has taxable income of $72,000. Their PAYG withheld for the year was $15,600. Calculate their total tax liability including Medicare levy, and determine whether they receive a refund or owe a debt. (3 marks)

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ApplyBand 43 marks

SA 3. A taxpayer's taxable income is $95,000 and PAYG withheld was $22,000. Calculate whether they receive a refund or owe a debt. (3 marks)

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📖 Answers (click to reveal)

SA 1 (2 marks): Bracket: $45,001–$120,000 [1]. Income tax = $5,092 + 0.325 × ($60,000 − $45,000) = $5,092 + $4,875 = $9,967.00 [1].

SA 2 (3 marks): Income tax = $5,092 + 0.325 × ($72,000 − $45,000) = $13,867 [1]. Medicare levy = $72,000 × 0.02 = $1,440 [1]. Total liability = $15,307. Refund = $15,600 − $15,307 = $293 refund [1].

SA 3 (3 marks): Income tax = $5,092 + 0.325 × ($95,000 − $45,000) = $21,342 [1]. Medicare levy = $95,000 × 0.02 = $1,900 [1]. Total liability = $23,242. Debt = $23,242 − $22,000 = $1,242 debt [1].

Boss battle · The Tax Office

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Five timed questions on income tax brackets, Medicare levy, and refund/debt calculations. Beat the boss to bank a tier.

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Science Jump · platform challenge

Climb platforms by answering questions on income tax. Pool: lessons 1–8.

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Module overview · Maths Standard