In the modern market system of economies in most countries income variations are common between citizens of the same country. At each point in time some individual households earn relatively less while others earn relatively more in the same economy and this result to the inequality in the distribution of national income and national wealth. There are various reasons for the existence of these variations and the negative impacts of the same. This paper tries to explain income distribution in Australia over the past 10 years, investigate the effects of income inequality in the country and the measures the government has taken to achieve an equal income distribution. The paper will use Gini coefficient and comparisons of incomes of households and individuals at different classes of income. The household income data used in this study will be those adjusted by the Australian Bureau of statistics to reflect the requirement of larger households having a higher level of income to achieve the same living standards.An individual income is made up of labor incomes returns on investments and other capital gains. Generally the lower class of citizens in terms of income derive their income from labor earnings while the rich class have multiple sources of income, including labor earnings, incomes from investments and capital gains. The poor class earns little labor wages that are less elastic compared to the wealthy class of citizens whose incomes grow at big margins depending on their choices of investments and the career choices. This is a major factor that creates income inequality in economies as the wealthy class gains more from economic growth than the lower income class.