Individual Tax Returns in Australia: Basics and Key Changes for FY2025 and FY2026

Understanding how individual tax returns work in Australia is essential for employees, contractors, investors, and business owners. Each year, millions of Australians lodge their tax returns with the Australian Taxation Office (ATO), either directly or through professionals such as Accountants Sydney. Whether you expect a refund or need to pay additional tax, knowing the fundamentals helps you avoid errors, maximise deductions, and stay compliant with tax law. This article explains the core components of individual tax returns in Australia and our Accountant Sydney highlights important changes affecting the 2025 and 2026 financial years.

What Is an Individual Tax Return in Australia?

An individual tax return is an annual statement submitted to the ATO reporting your income, deductions, tax offsets, and tax already paid. The Australian financial year runs from 1 July to 30 June. For example:

• FY2025 covers 1 July 2024 to 30 June 2025

• FY2026 covers 1 July 2025 to 30 June 2026

Most individuals lodge their tax returns between 1 July and 31 October, unless using a registered tax agent, who may provide extended deadlines.

The purpose of the tax return is to calculate your taxable income and determine whether you owe additional tax or are entitled to a refund.

How Taxable Income Is Calculated

Taxable income is the starting point of your tax assessment. It is calculated using the formula:

Taxable Income = Total Income – Allowable Deductions

Types of Income You Must Report

Income includes all earnings received during the financial year, such as:

• Salary and wages

• Bonuses and commissions

• Investment income (interest, dividends)

• Rental income

• Business income

• Capital gains from asset sales

• Foreign income

Employers report salary and wage income directly to the ATO through Single Touch Payroll, making this information pre-filled in your tax return.

Allowable Deductions

Deductions reduce your taxable income, which lowers your tax liability. To claim a deduction, expenses must meet three conditions:

1. Related directly to earning your income

2. Not reimbursed by your employer

3. Supported by records (receipts, invoices, bank statements)

Common deductions include:

• Work-related expenses

• Vehicle expenses (if work-related)

• Home office expenses

• Self-education expenses

• Professional memberships

• Investment-related expenses

Maintaining accurate records is essential, as the ATO may request proof.

Australian Resident Tax Rates for FY2025 and FY2026

Australia uses a progressive tax system. This means higher income levels are taxed at higher rates. According to the ATO, resident tax rates for FY2026 include:

Taxable IncomeTax Rate$0 – $18,200Tax free$18,201 – $45,00016%$45,001 – $135,00030%$135,001 – $190,00037%Over $190,00045%

The first $18,200 is tax-free, known as the tax-free threshold.

These rates apply to both FY2025 and FY2026. However, future tax cuts have already been legislated starting from FY2027.

Medicare Levy and Medicare Levy Surcharge

In addition to income tax, most Australians must pay the Medicare levy, typically 2% of taxable income. This funds Australia’s public healthcare system.

However, low-income earners may be exempt or pay a reduced rate. The government increased Medicare levy exemption thresholds starting 1 July 2024, meaning more low-income earners pay less tax.

For example, low-income thresholds increased to:

• Singles: $27,222

• Families: $45,907

Higher-income earners without private hospital insurance may also pay the Medicare Levy Surcharge (MLS). For FY2026, surcharge thresholds include:

Single IncomeMLS Rate$101,000 or less0%$101,001 – $118,0001%$118,001 – $158,0001.25%Over $158,0001.5%

This surcharge encourages higher earners to obtain private health insurance.

Tax Offsets and Credits

Tax offsets reduce the tax payable after calculating income tax. Unlike deductions, offsets reduce tax directly rather than reducing taxable income.

Common tax offsets include:

• Low Income Tax Offset (LITO)

• Seniors and Pensioners Tax Offset (SAPTO)

• Private health insurance rebate

• Franking credits from dividends

Offsets cannot create refunds beyond tax already paid but can reduce tax payable to zero.

Tax Withholding and Refunds

Employers withhold tax from your salary and pay it to the ATO throughout the year. This is called Pay As You Go (PAYG) withholding.

At tax time, the ATO compares:

• Tax already withheld

• Tax actually payable based on your income

You will either:

• Receive a refund if too much tax was withheld

• Pay additional tax if insufficient tax was withheld

Most employees receive refunds due to deductible expenses or conservative withholding rates.

Common Mistakes to Avoid When Lodging Tax Returns

Many taxpayers make avoidable errors. These include:

1. Failing to declare all income

All income must be reported, including foreign income and investments.

2. Claiming non-deductible expenses

Personal expenses unrelated to income are not deductible.

3. Poor record keeping

Missing receipts may result in denied deductions.

4. Claiming incorrect work-from-home expenses

The ATO applies strict calculation methods.

Working with experienced professionals reduces these risks significantly.

Key Changes Affecting FY2025 Tax Returns

Several important changes affect individual tax returns for FY2025.

1. Increase in Medicare Levy Thresholds

The government increased thresholds to reduce tax for low-income earners. This means:

• Some taxpayers will pay less Medicare levy

• Some taxpayers may be exempt entirely

This provides direct tax savings for lower-income Australians.

2. Updated Medicare Levy Surcharge Thresholds

MLS thresholds increased, meaning fewer people pay the surcharge compared to previous years.

This is particularly relevant for individuals earning near threshold levels.

Key Changes Affecting FY2026 Tax Returns

While FY2026 tax rates remain mostly unchanged, several broader structural changes are important.

1. Future Tax Rate Reductions Legislated

From 1 July 2026, the tax rate for the $18,201 to $45,000 bracket will reduce from 16% to 15%.

This means:

• Lower tax payable for most individuals

• Increased tax refunds or reduced tax liabilities

These cuts will continue further in FY2027.

2. Increased Medicare Levy Exemption Thresholds Continue

Low-income earners benefit from continued higher exemption thresholds, reducing their overall tax burden.

How the Tax Return Is Lodged

Individuals can lodge tax returns through:

1. MyGov and MyTax (ATO online)

Best suited for simple tax affairs.

2. Registered Tax Agents

Recommended for:

• Investment income

• Rental properties

• Business income

• Complex deductions

Tax agents often help maximise deductions and ensure compliance.

Work-Related Expense Claims: Key Considerations

Work-related deductions are a major factor in tax refunds. However, the ATO enforces strict rules.

Examples of valid claims include:

• Tools and equipment

• Uniforms

• Professional subscriptions

• Home office expenses

Expenses must be genuinely related to earning income.

Importance of Accurate Tax Planning

Tax planning involves structuring finances to minimise tax legally. This includes:

• Timing income and expenses

• Maximising deductions

• Using tax offsets

• Managing investment income

Tax planning should be done before the financial year ends, not just at tax time.

Tax Return Processing and Refund Timing

Most tax returns are processed within 2 weeks when lodged electronically.

Refund timing depends on:

• Accuracy of the return

• Whether additional review is required

• Lodgement method

Using professionals often improves accuracy and speeds processing.

Why Individual Tax Returns Matter

Tax returns serve several critical functions:

• Ensure legal compliance

• Calculate accurate tax liabilities

• Provide refunds where applicable

• Establish income records for loans and visas

• Maintain financial transparency

Failing to lodge tax returns may result in penalties.

Conclusion

Individual tax returns in Australia are a fundamental part of the financial system. They ensure individuals pay the correct amount of tax based on income, deductions, and applicable offsets. Understanding how taxable income is calculated, what deductions are allowed, and how tax rates apply is essential for all taxpayers.

The FY2025 and FY2026 tax years introduce important changes, including increased Medicare levy thresholds and future tax rate reductions, which will lower tax burdens for many Australians. Staying informed about these changes helps individuals optimise their tax outcomes and remain compliant with ATO requirements.

Whether lodging independently or using professional assistance, accurate tax returns ensure taxpayers benefit from refunds, avoid penalties, and manage their financial obligations effectively.

City Tax Accountants are the only Accountants Sydney can offer complimentary advice