Gross to net pay in Australia: how it works
Reviewed by Mellow Editorial Team, HR & payroll content team
Gross to net pay is the process of starting with an employee's total earnings and deducting tax, superannuation obligations and other withholdings to arrive at the amount you actually transfer to their bank account. Here is how each step works in Australia.
Start with gross pay
Gross pay is everything an employee earns before any deductions. For a salaried employee, it is their agreed annual salary divided across your pay periods. For hourly workers, it is hours worked multiplied by their rate, plus any applicable penalty rates, overtime or allowances under their award or agreement.
Include all taxable components: base salary, bonuses, commissions, allowances and any fringe benefits you pay through salary packaging. Some allowances — such as a genuine expense reimbursement — may be exempt from withholding, but that is the exception rather than the rule.
Withhold income tax through PAYG
Once you have gross pay, your first deduction is income tax under the Pay As You Go (PAYG) withholding system. Australia uses a progressive tax scale, meaning employees on higher earnings have a larger proportion withheld. You use the ATO's tax withheld calculator or tax tables to determine the correct amount based on the employee's gross pay, their pay frequency, and the information on their TFN declaration or through myTax.
Two common add-ons sit alongside the basic income tax calculation:
Medicare levy. Most employees have a 2% Medicare levy applied on top of their income tax. Low-income earners may be exempt or pay a reduced amount, and employees who hold a Medicare levy exemption certificate have it removed entirely.
HECS/HELP repayments. If an employee has a study debt and their income crosses the repayment threshold, you are required to withhold an additional amount on a banded scale set by the ATO each year. The employee declares this on their TFN declaration by ticking the HECS/HELP box. You do not send this directly to their loan account — it is remitted to the ATO as part of their regular PAYG withholding and reconciled when they lodge their tax return.
The combined PAYG withholding amount covers all three of these components where applicable.
Account for superannuation
Superannuation is not deducted from an employee's take-home pay in the standard sense — it is an employer contribution paid on top of gross wages. From 2026, the Superannuation Guarantee rate is 12% of ordinary time earnings, meaning you must contribute that amount to each eligible employee's complying super fund separate from the net pay transfer.
It is worth understanding this distinction clearly. An employee's payslip may show super as a line item for transparency, but unless they have a salary sacrifice arrangement, their take-home pay is not reduced by super — your business pays it as an additional labour cost. Salary sacrifice is the exception: when an employee voluntarily directs pre-tax earnings into super, that amount reduces their gross taxable income before you calculate PAYG, and their net pay is lower as a result.
Apply any other deductions
After income tax, there may be other agreed or required deductions before you reach the final net figure:
- Salary sacrifice for items other than super, such as a novated lease or additional superannuation contributions, reduces gross pay before tax is calculated.
- Post-tax deductions — for example, a voluntary employee-nominated health insurance payment — come out after tax and do not reduce the taxable gross.
- Child support garnishee orders from Services Australia must be applied as directed.
Keep clear records of each deduction type. Mixing up pre-tax and post-tax treatment is a common payroll error and can produce incorrect PAYG withholding.
Report via Single Touch Payroll and finalise
Every time you run a pay event, you must report it to the ATO through Single Touch Payroll (STP). This means each payslip triggers a real-time data transmission — gross earnings, PAYG withheld, and super liability — to the ATO before or on the day you pay your employees.
At the end of the financial year, you complete an STP finalisation by 14 July. This replaces the old payment summary process. Finalisation locks in each employee's year-to-date figures so they can lodge their personal tax return. If you miss the deadline or submit incorrect data, employees may be unable to finalise their returns and the ATO may follow up with you directly.
Net pay — the figure that lands in your employee's account — is gross pay minus PAYG withholding, minus any salary sacrifice or other pre-tax deductions, minus any post-tax deductions. Super sits outside this calculation as a separate employer obligation. Getting each component in the right order, and reporting accurately through STP, is what keeps your payroll compliant.
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