Understanding tax brackets and how to minimise your tax burden

There is no way we can get rid of our taxes, as they are an inevitable part of our lives in society. However, it doesn’t mean that we can’t find alternatives to legally reduce them, maintain control over our financial lives, optimize our debts and payments, organize our calculations and make the best of the opportunities.

Along with the taxes comes the concept of tax brackets, but do you understand what they are and how they work in your daily life? In this article, we aim to give you a simple yet efficient guide to help you understand how the Australian financial world works and which strategies you can use to improve your tax efficiency.

How Australia’s Tax System Works

First of all, especially if you’ve just started your adult life, you should probably begin by understanding how Australia’s tax system actually works, so you know exactly what you are dealing with.

Basically, when an employer pays your salary, they automatically take out the percentage that must be sent to the Australian Taxation Office (ATO), and you can see this deduction on your payslip. According to the institution, at the end of the year you will be able to see your income statement or payment summary, which will show you exactly how much tax has been taken.

The office also explains exactly how your taxation happens, since it may vary depending on many different factors, such as how much income you earn (where we apply the tax brackets), whether you have more than one job, your tax residency, and more.

Understanding Tax Brackets

Now that you understand how the Australian tax system works, it’s time to dive deeper into what tax brackets actually are and how they impact your financial life.

Basically, tax brackets are ranges of income that are taxed at different rates, using a progressive system. This means that the more you earn, the higher the percentage of tax you’ll pay on the portion of your income that falls into each bracket—not your entire income.
Let’s break that down with a simple example.

As of the 2024–2025 financial year, the tax brackets for Australian residents are:

• $0 – $18,200: Tax-free
• $18,201 – $45,000: 16%
• $45,001 – $135,000: 30%
• $135,001 – $190,000: 37%
• Over $190,000: 45%

Note: These rates do not include the Medicare levy of 2%.

Let’s illustrate this with an example. Suppose you earn $60,000 annually:

• The first $18,200 is tax-free.
• The next $26,800 (from $18,201 to $45,000) is taxed at 16%, resulting in $4,288 in tax.
• The remaining $15,000 (from $45,001 to $60,000) is taxed at 30%, resulting in $4,500 in tax.

So, your total tax payable would be $8,788, and your effective tax rate (the average rate across your entire income) would be approximately 14.65%.

Why Does This System Exist?

Every citizen contributes to government services through taxes—this isn’t unique to Australia. The idea behind the bracket system is to promote fairness: those who earn less keep more of what they make, while those with higher incomes contribute more. It’s a way to balance individual responsibility with public good.

Still, tax brackets are often the subject of debate. Some argue that wealthier people should contribute more through mechanisms like wealth taxes, while others believe the system already overburdens the middle class. These discussions are ongoing in Australia and around the world.

Other Factors That Affect Your Tax

Your total tax payable isn’t based on income alone. The ATO also considers:

• Whether you have more than one job
• Whether you’re an Australian resident for tax purposes
• Your deductions, such as work-related expenses or donations
• Any offsets or rebates you may be eligible for
• Whether you earn income from investments, side gigs or overseas

Also, remember that employers must contribute to your superannuation separately, and it’s not taxed in the same way as your salary—but it’s still part of your overall financial picture.

Important Dates and Thresholds

In Australia, the financial year runs from 1 July to 30 June. You are required to lodge a tax return if your taxable income exceeds the tax-free threshold of $18,200. If you’re a temporary resident, international student, or planning to leave the country, your obligations may differ, so it’s best to check the ATO’s official website for guidance tailored to your situation.

Why Understanding Tax Brackets Matters

By understanding how tax brackets work, you can:

• Better estimate how much of your salary you’ll take home
• Make smarter decisions about deductions and savings
• Avoid surprises when lodging your tax return
• Stay compliant with government requirements

Even more importantly, this knowledge empowers you to take control of your financial future. Missing deadlines, failing to report income, or misunderstanding your tax obligations can lead to unnecessary stress—or worse, legal trouble.

So take the time to explore the ATO’s resources, speak to a tax agent if needed, and use your tax knowledge as a tool to build financial stability.

Learning About Deductions

Now, not everything is lost! Even when you have to lodge a tax return or your tax brackets are too high, you can still claim deductions for some of the costs you’ve had over the year. These deductions can be a great way to boost your finances and, of course, recover at least a portion of the taxes you’ve paid. Take a look at the list below, where we break down a few areas in which you may be eligible for a refund.

Work/Education

Did you spend anything on your job or education? Tools, uniforms, home office expenses, and courses that directly improve your current job skills may be tax-deductible, as long as the expenses weren’t reimbursed by your employer. Be sure to review your work-related costs and keep all supporting records, such as receipts and invoices. These are essential to support your claim with the ATO.

Property

Did you invest in a rental property this year? If so, you may be able to claim tax deductions related to your investment, such as loan interest, maintenance, eligible repairs, and depreciation of assets. These deductions apply only if the property is generating income and can help make your investment more financially efficient. Make sure you keep detailed records and understand the difference between immediate deductions and long-term capital claims.

Health

Medical expenses are generally not deductible in Australia anymore, except in very specific cases. However, some disability-related expenses or costs related to certain medical aids or equipment may still be claimed. It’s important to check the ATO’s current guidelines, as the rules in this area are limited and very specific.

Charity

Did you make donations during the year? Good news: gifts and donations to registered charities may be tax-deductible, as long as the organization is endorsed as a Deductible Gift Recipient (DGR) and you keep the receipt. It’s a meaningful way to support causes you care about—and receive a tax benefit at the same time.

Keeping Your Records in Order

To claim any of these deductions, one thing is essential: your records must be detailed, well-organized, and include receipts. This helps avoid stress and ensures you’re prepared when it’s time to lodge your return.

According to the ATO, you must also be able to prove that:

• The money was not reimbursed;
• The expense is directly related to earning your income.

Your employer should provide you with an income statement (via myGov) or a payment summary. These documents show how much you earned and how much tax was withheld, and they form the foundation of your tax return.