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Income tax 2025-26: the brackets and the stage 3 aftermath

The 2025-26 financial year operates under the post-Stage 3 tax bracket framework. The reforms reduced tax for lower and middle income earners relative to the original pre-2024 Stage 3 plan, while simplifying the bracket structure. Understanding the current brackets is central to any tax planning.

The 2025-26 income tax brackets (residents)

  • $0 - $18,200: nil (tax-free threshold)
  • $18,201 - $45,000: 16 cents per dollar (reduced from 19% under the 2024 reforms)
  • $45,001 - $135,000: 30 cents per dollar (the broad middle bracket)
  • $135,001 - $190,000: 37 cents per dollar
  • $190,001 and above: 45 cents per dollar

Plus the Medicare levy (2% for most) and Medicare levy surcharge for high earners without private health cover.

What the 2024 Stage 3 revisions changed

The original (pre-Labor revision) Stage 3 plan would have:

  • Removed the 37% bracket entirely
  • Extended the 30% bracket to $200,000
  • Started the 45% bracket only above $200,000

The 2024 revision:

  • Retained the 37% bracket (now $135k-$190k)
  • Lowered the 19% bracket to 16%
  • Shifted the 37% threshold up from $135k to capture only high earners
  • Delivered bigger tax cuts to earners between $18k-$135k; smaller cuts to earners above $200k

Winners: lower and middle income households. Losers (relative to the original Stage 3): very high income earners above $200k.

Comparison across income levels

Annual tax payable (resident, no Medicare levy considered):

  • $50,000 income: $4,688
  • $80,000 income: $13,688
  • $100,000 income: $19,688
  • $130,000 income: $28,688
  • $150,000 income: $34,238
  • $200,000 income: $54,738
  • $250,000 income: $77,238

At $100k, effective tax rate including Medicare is approximately 21.6%. At $200k, effective rate is approximately 29.4%.

The effective marginal rate trap

For most PAYG workers, the effective marginal rate is:

  • Base marginal rate: from the brackets above
  • Plus Medicare levy: 2%
  • Plus Medicare levy surcharge (if applicable): 1%, 1.25%, or 1.5% depending on income
  • Plus Division 293: 15% on concessional super contributions for earners above $250k

A high earner with $250k income and no private health cover can face a marginal rate of 45% + 2% + 1.5% + 15% on concessional super = effectively well over 50% on additional dollars of income.

The tax-free threshold effect

The $18,200 tax-free threshold plus the Low Income Tax Offset (LITO, now $700 reducing tax for lower earners) means effective tax on a $25,000 income is only about $3%. This creates meaningful income-splitting opportunities for families where one partner has low income.

Strategy: income splitting where legitimate

For families, consider:

  • Superannuation contributions for the lower-earning spouse (concessional contributions cap $30k/year)
  • Distributions from family trusts to adult children (at their marginal rates)
  • Investment property ownership by the lower-earning spouse (where loan structure permits)

All these require valid commercial substance, not just tax-motivated transactions. The ATO’s Part IVA anti-avoidance rule catches arrangements lacking economic purpose.

Strategy: timing around brackets

If your income sits near a bracket threshold (especially $135k or $190k), small timing changes can produce disproportionate savings:

  • Deferring a bonus from June to July may move it into a year with lower income
  • Bringing forward a deductible expense may shift a year into a lower bracket
  • Salary sacrifice for super at 15% (plus Div 293 if applicable) vs marginal rate of 37-45%

A $5,000 bonus moved from a $190k-income year to a $175k-income year saves $400 in tax (45% vs 37% marginal, after Medicare).

Strategy: superannuation top-up

Concessional contributions are capped at $30,000/year (2025-26). For someone on $150k marginal rate of 37% + 2% = 39%:

  • Salary sacrificing $10,000 reduces take-home by $6,100
  • Contribution tax in super: 15% = $1,500
  • Net benefit: $3,900 less tax paid for $8,500 going into super (ultimately retirement savings)

For earners above $250k, Division 293 adds another 15% on the contribution, reducing but not eliminating the benefit.

Strategy: capital gains timing

Capital gains are added to your taxable income in the year the asset is sold. For large gains:

  • Deferring sale from one tax year to the next can shift the gain into a lower-income year
  • Splitting ownership (where legitimate at purchase) splits the gain across two individuals’ brackets
  • Timing relative to retirement can be highly effective (sell in the year after employment income reduces)

The low-income buffer

For households with one partner at lower income, the tax-free threshold means approximately $18,000 of investment income per year can be received tax-free. Interest, dividends, rental income can all flow to the lower-income spouse if structured at acquisition (joint accounts won’t retrospectively fix this).

Where to focus

For most households, the tax strategy pecking order:

  1. Maximise concessional super contributions (best tax efficiency at middle-to-high incomes)
  2. Own investment assets in the lower-income spouse’s name where legitimate
  3. Use family trusts for flexibility on active investment income (with professional advice)
  4. Time major capital gains around employment transitions
  5. Claim all legitimate work-from-home and work-related deductions

These basic strategies deliver most of the accessible tax optimisation. More exotic structures rarely justify their complexity for households earning under $500k.