12 Steps to Understanding Taxes in Australia: A Guide for International Residents

Australia’s tax system serves as the backbone of funding public services such as education, healthcare, transportation infrastructure, and social programs. However, for international residents who have recently arrived in the country—whether for work, study, or to settle down—understanding the tax framework can be quite challenging. This comprehensive guide simplifies key aspects of the Australian tax system, providing straightforward explanations and relevant examples to make understanding taxes easier than ever. 

Key Insights into the Australian Tax System

Australia uses a progressive taxation model (not to be confused with progressive meaning modern!), where higher incomes are taxed at higher rates. The money collected is managed by the Australian Taxation Office (ATO) and cover areas such as income tax, the Goods and Services Tax (GST), the Medicare levy, and employer contributions to retirement funds through superannuation schemes.

It’s important to note that tax obligations for international residents are not determined by your specific visa subclass, but rather by your tax residency status. To establish whether you qualify as a tax resident, the ATO assesses factors including the legitimacy of your stay, personal ties (such as maintaining accommodation or employment within the country), and the total period of time spent in Australia.

You can always reach out to the ATO directly to ensure you’re fully aware of your circumstances and you comply with relevant requirements. 

Income Tax 

This is the primary source of government revenue in Australia and applies to income earned from employment, investments, business activities, and certain government payments. The financial year in Australia runs from 1 July to 30 June of the following year, and residents are required to lodge a tax return annually. The default deadline for filing a return is 31 October, and submitting returns on time helps avoid fines or delays in compliance processes, which could otherwise result in penalties.

Australian residents are taxed on their worldwide income, including money earned both domestically and internationally. Non-residents, however, are only taxed on their Australian-sourced income. This distinction is crucial for understanding the relevant tax obligations, especially for those who work or invest across borders.

We’ve created a simple tax calculator here that you can use to see how much tax you can expect to pay based on your income.

Tax deductions also play a significant role in the Australian taxation system. These are expenses directly related to earning an income that can be claimed to reduce your taxable income. Common deductions include work-related expenses, home office costs, professional development expenses, and certain investment-related costs. However, strict rules apply, and all claims must be substantiated with proper documentation.

The tax system also includes various offsets and rebates designed to provide tax relief to eligible taxpayers. These can include the Low and Middle Income Tax Offset (LMITO), Senior and Pensioner Tax Offset (SAPTO), and other specific rebates based on personal circumstances. 

Tax-Free Threshold

Australian residents for tax purposes are entitled to a tax-free threshold of AUD 18,200. This means they do not pay tax on income up to this amount. However, international residents who are classified as non-residents for tax purposes are not eligible for this threshold and are taxed on every dollar of income earned in Australia.

Managing the tax-free threshold becomes particularly important for people with multiple sources of income, or those working several jobs simultaneously. A good rule of thumb is to claim the threshold from only one employer, typically the primary or highest-paying job, to avoid under-withholding of tax and potentially facing a debt at the end of the financial year. When starting a new job, employees must complete a Tax File Number (TFN) Declaration form, where they indicate whether they wish to claim the tax-free threshold from that employer. More on TFN numbers here.

For those who become Australian residents partway through the financial year, the tax-free threshold is adjusted proportionally based on the number of months they qualify as residents. The formula takes into account the exact date of residency grant and adjusts the threshold accordingly, helping new residents understand their tax obligations during their transition period.

Tax Rates

For residents, the income tax rates range from 16% to 45%, depending on income brackets. All updated rates can be found here. The tax rates for years 2024/2025 can be found below:

As a quick summary, the rates are 0%, 16%, 30%, 37% and 45% depending on the income bracket. 

Non-residents face a different tax structure, starting at 30% for the first AUD 135,000 earned. 

You can access all of the most recent rates here, with the below being rates for years 2024/2025:

Again as a quick overview, the rates are 30%, 37% and 45% depending on your income. 

PAYG System

Most employees in Australia are part of the Pay-As-You-Go (PAYG) tax system, where employers withhold a portion of their salary to cover income tax obligations. This ensures that taxes are paid incrementally throughout the year, instead of putting this burden on individuals at the end of the financial year. 

The amount withheld is based on the employee’s earnings and the applicable tax rates, which are determined by the Australian Taxation Office (ATO). Employers use a tax table or an online calculator provided by the ATO to determine the correct withholding amount.

If you’re an employee, chances are your business will deduct your taxes from your pay per the PAYG system. If you’re a contractor and you work on your own ABN, you will need to calculate and pay your own taxes, and most likely the PAYG system won’t apply to you.

Goods and Services Tax (GST)

The GST is a broad consumption tax of 10% applied to most goods and services sold in Australia. It is included in the price of items you purchase, so you generally don’t need to calculate it separately. Some essential items, such as fresh food, healthcare services, and education, are GST-free.

If you operate a business in Australia and earn more than AUD 75,000 annually, you are required to register for GST with the ATO and include GST in your pricing. Registering for GST unfortunately means more admin work, as you will need to report to the ATO quarterly and complete additional returns.

However, being forced to maintain your financial records often provides valuable insights into your business, so the admin involved in completing your Business Activity Statement (BAS) may be a blessing in disguise. Adding GST to your prices will also artificially inflate them for your customers, which can also be a drawback.

However, according to this business advisor, “GST registration may project an image of an established business which is reliable and sound. Often businesses that are not registered for the GST may appear to be very new and may give the impression of being financially fragile.” So while you might not be required to do so, registering for GST before you hit the $75,000 threshold might bring some benefits. When you register for GST, you will also be able to claim back the GST you paid on your own business purchases.

As with any financial matters, it’s always best to speak to an accountant or tax lawyer to make sure you’re making the best decisions in your circumstances. 

For a customer perspective, if you ever require the services of a business or tradesperson, including a plumber, electrician or mechanic, the payment invoice you receive will usually list the price for their service, with GST listed below, then the total price:

When working with any trades and asking for prices, always confirm whether the price they’re quoting you includes GST or not. 

Medicare Levy

Australia’s Medicare system provides access to public healthcare services, funded in part by the Medicare levy. This levy is typically 2% of your taxable income and applies to most residents for tax purposes. However, international residents may be exempt if their visa does not grant access to Medicare benefits or if they hold private health insurance that meets specific requirements.

For higher-income earners without adequate private health insurance, an additional Medicare Levy Surcharge (MLS) may apply. This surcharge ranges from 1% to 1.5%, depending on income levels. 

On the other hand, there are also thresholds for lower income earners that don’t have to pay this levy. If you earn below $29,032 (at the time of writing), you don’t have to pay this levy. 

The Medicare Levy is calculated based on an individual’s taxable income. For example, if a person has a taxable income of $50,000, their Medicare Levy would be: 

Medicare Levy = 0.02 × $50,000 = $1,000

Benefits of the Medicare Levy: The revenue generated from the Medicare Levy contributes significantly to the funding of Australia’s public healthcare system, ensuring access to essential medical services for all residents. This surcharge also incentivises higher-income individuals to obtain private health insurance, helping to alleviate pressure on public healthcare services.

Superannuation

Superannuation (commonly referred to as “super”) is Australia’s retirement savings system. The intricacies of this system get very confusing very fast, so we break them down here in more detail so you can better understand the retirement fund system. 

Generally, this does not depend on your visa (so long as you have work rights) or tax residency status. You can use this online tool to find out if you’re eligible for superannuation. 

The general idea is that your employer, in most cases, will make contributions to your super – which essentially means that they take a portion (11.5/12% in 2025) of your income and put it in a savings account for your retirement. 

This system makes saving for your old age very easy, because you don’t have to think about putting money aside for the next 30 years, or think about how on earth you’re going to keep your hands off it until you retire without the willpower of a god. Here’s where the government comes in to help (wink wink ;)). In simple terms, if you take your money out of your super before you turn 60, you’ll pay a bunch more tax. 

Lodging Your Tax Return

All individuals that have an income in Australia must lodge a tax return with the ATO by 31 October each year, unless they use a registered tax agent who can request extensions. Lodging your return involves declaring all income earned during the financial year and claiming deductions for eligible expenses, such as work-related costs or charitable donations. All information related to actually lodging your return, including any deductions you can make 

If you’re an international resident or on a temporary visa, you may find it helpful to speak to a registered tax agent or accountant familiar with cross-border taxation issues. 

International residents may find it beneficial to seek assistance from a registered tax agent or accountant familiar with cross-border taxation issues. The ATO also provides online tools and resources to help individuals understand their tax obligations.

You can start with this general page from the ATO on how to lodge your tax return, including doing so from outside of Australia and before you leave. 

Tax Residency Status

Determining your residency status for tax purposes is crucial because it affects your tax rates and entitlements. The ATO uses several tests, including the “resides test” and the “183-day test,” to assess whether you qualify as an Australian resident for tax purposes. You can find all the official decision tools here. Here’s a quick summary:

1. Resides Test

If you reside in Australia, you are considered a tax resident. This is based on your behaviour and intention to live in Australia.

2. Domicile Test

If your domicile (permanent home) is in Australia, you are a tax resident unless you have a permanent home overseas and do not reside in Australia.

3. 183-Day Test

If you are physically present in Australia for 183 days or more in a tax year, you are considered a tax resident, provided you do not have a permanent home outside Australia.

4. Commonwealth Superannuation Test

This applies to certain members of the Australian Defence Force and their families. If you are a member, you are a tax resident.

Residents for Tax Purposes

Australian tax residents get the benefit of earning up to $18,200 tax-free each year and can claim special tax deductions. They can also get credit for tax paid overseas through foreign income tax offsets.

On the downside, tax residents must declare all money they earn worldwide, not just in Australia. This means they might pay more tax overall. It can also be tricky to work out if someone qualifies as a tax resident, and there’s a risk of being taxed twice on the same income unless there’s a tax agreement between countries. You might also be eligible to claim a foreign income tax offset, if you’ve already paid a portion of your tax on international income in a different country. You can find all the eligibility details here. 

For people who become residents partway through the year, they get less of the tax-free amount, which means they might pay more tax than they expected.

As a reminder, resident tax rates are as follows:

Non-Residents for Tax Purposes

The main benefit is that you only need to declare specific types of income – mainly what you earn in Australia and some overseas employment income for temporary residents. Foreign residents don’t pay the Medicare levy, and temporary residents don’t have to declare most of their foreign income or capital gains, which can simplify tax matters (more on this here).

However, foreign residents don’t get any tax-free threshold, meaning they pay tax from the first dollar earned in Australia. They must also pay tax on their Australian rental income, pensions, and capital gains on Australian assets. For those with study debts like HELP or VSL, they still need to declare their worldwide income. Additionally, if they sell their Australian home while being a foreign resident, they may need to include the capital gain in their tax return, which could result in a higher tax bill.

Here are the tax brackets for non-residents (also found here):

It’s worth noting that working holiday makers on specific visas are subject to different tax rules, which impose a flat rate of 15% on income up to AUD 45,000. If you earn more than that, below are the official tax brackets for the years 2024-2025 (can also be found here):

Tax Deductions and Refunds

As a resident, you may be eligible to claim deductions for expenses directly related to earning your income. Common deductions include work-related travel expenses, uniforms, home office costs, and self-education expenses. Here’s a detailed guide from the ATO on the kinds of deductions you can claim. 

To claim a work-related deduction, you must have spent the money yourself without reimbursement, the expense must directly relate to earning your income, and you must keep proper records (usually receipts) as proof. Here’s a detailed guide on how to claim deductions. 

Your taxable income is calculated by subtracting your deductions from your assessable income, and it’s important to note that if an expense was incurred for both work and private purposes, you can only claim the work-related portion. The ATO provides tools like myDeductions in their app to help track expenses, and they offer specific guides for different occupations and industries to help people understand what they can legitimately claim.

If you’ve paid more tax than required during the financial year (e.g., through PAYG withholding), you may be entitled to a refund after lodging your tax return. The tax withheld from your paycheck by employers is usually only an estimate, not the final amount you’ll owe the government. Your actual tax bill can only be calculated after the financial year ends, taking into account your total income and expenses.

This can lead to two common situations: If you work only part of the year, you might have overpaid tax because your employer withheld at a rate assuming full-year employment. On the other hand, if you have multiple jobs, you might have underpaid tax because each employer withholds tax based only on what they pay you, without knowing about your other income sources, while your total income could push you into a higher tax bracket.

As with all financial matters, if you’re ever unsure of exactly what to do, it’s best to talk to a tax professional, who will analyse your personal circumstances and advise you on the best actions to take in your particular situation.

Penalties for Non-Compliance

Failing to meet your tax obligations can result in penalties from the ATO. Generally speaking, if this is your first time not paying or lodging on time, it’s very unlikely you will receive a fine right away. The ATO will attempt to contact you via phone or mail first to clarify the cause of the missed payment or lodgement. If you fail to respond or provide a reason, you might then be issued a fine or penalty.

For example, you may receive a Failure to Lodge (FTL) on time penalty if you don’t pay your taxes on time, with one penalty unit being counted for each period of 28 days that the return or statement is overdue, up to 5 penalty units total. At the time of writing, a penalty unit is $330, however increasing yearly, as can be seen here:

This means that right now, the total fine for a missed payment can be $1,650. 

There is one circumstance where you can be exempt from such a penalty, and that is lodging your return through a registered tax agent (RTA). This is called a safe harbour provision. Safe harbour from the FTL penalty applies when using a registered tax/BAS agent if:

1. You provided all relevant information for timely lodgment
2. Agent’s failure to lodge wasn’t due to recklessness or intentional law disregard

Conclusion

Navigating Australia’s tax system – or any tax system, for that matter – can be complicated and overwhelming, even for the best of us. Understanding its key components, however, will help you stay compliant and take advantage of the available benefits. Whether you’re working, studying, or running a business in Australia, being informed about taxes is an integral part of managing your finances. For personalised advice tailored to your circumstances, consider consulting a registered tax agent or contacting the ATO directly.

Good luck—you’ve got this!