What are the Marginal Tax Rates?

The marginal tax rates you are likely to expect depends on your income. In this article we highlight the current marginal tax rates and also help explain the difference between marginal and effective tax rates.

As the Australian Taxation Office (ATO) points out, the tax rates paid by individuals aren’t generally set as a flat percentage of your income. Australia has a progressive tax rate system, meaning that the more income you earn, usually the higher your tax. Additionally, the ATO advises that certain taxpayers will be liable to pay other charges such as the Medicare Levy and Medicare Levy Surcharge.

What are the current tax rates?

According to the ATO, different sets of tax rates apply for residents, foreign residents, and businesses. Below we discuss some of the rates provided by the ATO, accurate at the time of writing.

For Australian tax residents

The ATO advises that being a resident for tax purposes is different to being a resident under the rules set by the Department of Home Affairs. This means that according to the ATO you can:

  • be an Australian resident for tax purposes without being an Australian citizen or permanent resident
  • have a visa to enter Australia without being treated as an Australian resident for tax purpose

If the ATO considers you to be an Australian resident for tax purposes, here are the tax tiers that will generally apply:

Taxable income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $87,000 $3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000 $19,822 plus 37c for each $1 over $87,000
$180,001 and over $54,232 plus 45c for each $1 over $180,000

Source: ATO

As shown in this table provided by the ATO, the amount of tax you pay will depend on the income you earn. You generally won’t pay any tax on the first $18,200 of taxable income and this is known as the ‘tax-free threshold’. Above this amount, you will usually need to pay a lump sum plus a percentage of any income you earn over each income threshold. You can find an example of how tax is calculated on income here.

The percentage rate of tax you pay is known as the ‘marginal tax rate’. Using the table provided by the ATO, if you earned between $18,201 and $37,000, your marginal tax rate would be 19%; if you earned between $87,001 and $180,000 then your marginal tax rate would be 37%. The highest marginal tax rate in Australia is currently 45%.

The ATO points out that these rates don’t include additional levies such as Medicare Levy and/or Medicare Levy Surcharge, which certain taxpayers are liable to pay. Children (‘minors’) aged under 18 years may also be subject to different tax rates; you can find more information about minor tax rates here.

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For foreign residents

According to the ATO, some people are treated as foreign residents for tax purposes if they receive an income from an Australian source, but are not considered a resident for tax purposes. The ATO provides examples of Australian citizens who are living and/or working in another country for an extended period of time, as well as foreign citizens who live abroad but receive employment or investment income from Australia. The ATO requires foreign residents to pay the correct amount of tax on all Australian-sourced income, and this will generally require a tax return to be lodged in Australia.

As shown in the table below provided by the ATO, foreign residents for tax purposes do not receive a tax-free threshold; foreign residents pay tax from the first dollar they earn in Australia. They can expect to pay a marginal tax rate between 32.5% and 45%

Taxable income Tax on this income
0 – $87,000 32.5c for each $1
$87,001 – $180,000 $28,275 plus 37c for each $1 over $87,000
$180,001 and over $62,685 plus 45c for each $1 over $180,000

Source: ATO

The ATO advises that foreign residents do not have to pay the Medicare Levy or Medicare Levy Surcharge.

For businesses

Australia’s company tax rates are relatively straightforward: according to the ATO, there’s a concessional tax rate for ‘base entities’, and a slightly higher standard company tax rate. A company is considered to be a base entity by the ATO if it:

  • Has an aggregated turnover of less than $25 million (increasing to $50 million for 2018/19)
  • ‘Carries on a business’ which essentially means that it:
    • Is established and maintained in order to make a profit for shareholders
    • Has its assets invested in activities intended to make a profit

Conversely, the ATO suggests that a company is unlikely to be carrying on a business if its activities aren’t commercial in nature and it has little or no prospect of making a profit.

Income category Rate (%)
Base rate entities 27.5
Otherwise 30

Source: ATO

What’s the difference between a marginal and effective tax rate?

As explained here, your marginal tax rate is the highest rate of tax you will pay on your income, based on which band or threshold your income falls in. Your effective tax rate, on the other hand, is the total amount of tax you pay expressed as a percentage of your income.

For example, your marginal tax rate might be 19%, but you might make use of one or several tax offsets/deductions and only end up having to pay 15% of your income as tax – so your effective tax rate would be 15%. You can calculate your effective tax rate by dividing the tax you pay (as assessed by the ATO) by your taxable income.

Speaking of taxable income: remember making concessional (before tax) contributions to your super can be a way to reduce your taxable income, and it’s also something that can benefit you in the long run. It’s a good idea to check the rules about concessional (and non-concessional) contributions on the ATO website here before making a decision. You should also make sure you’re with a super fund that suits your needs and consider funds with a strong performance history.

The following table contains details of the 5-star superannuation funds rated by Canstar based on someone aged 40-49 with a balance of $100,000-$250,000. This table has been sorted by provider name (a-z).

Please note that the performance information shown in the table is for the investment option used by Canstar in rating of the superannuation product.

To view the past performance of all super funds, rated by Canstar, use our comparison tool:

Compare Superannuation Funds

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