Understanding the Tax-Free Threshold

If you’re new to doing your tax returns or are well seasoned, no doubt you have seen the question, “Would you like to claim the tax-free threshold?” You may not have even thought about it, or assumed it was something it probably isn’t.

So, what is the Tax-Free Threshold?

If you’re an Australian resident for tax purposes, the first $18,200 of your annual income is not subject to tax. This is called the tax-free threshold.

At the start of a job, your employer/payer will give you a Tax file number declaration form to complete. Centrelink is considered a payer, so they will give you this form if you apply for payments.

The tax-free threshold amounts to around:

  • $350 per week
  • $700 per fortnight
  • $1,517 per month

When your taxable income exceeds the threshold, you pay tax on the excess amount.

Why should I claim the Tax-Free Threshold?

By claiming the tax-free threshold, you effectively reduce the amount of tax withheld from your income tax throughout the year.

As an Australian taxpayer, you are subject to pay a variety of taxes from your income. Reducing your taxable income by claiming deductible expenses you pay less tax overall.

How does the Tax-Free Threshold apply to me?

This threshold applies to you should you want to claim it or not. By claiming the threshold, you reduce your overall withheld tax. By not claiming the threshold, you initially increase the amount of tax withheld, but only from the first $18,200 earned.

Some use this method as a form of ‘forced savings’ – as they claim this inflated amount of tax back on their tax return as a lump sum of savings. Others strategically claim or do not claim the threshold depending on their personal circumstances.

You can discuss the best way to approach claiming the tax-free threshold by speaking with a tax accountant, like our team at Online Tax Returns.

Where does the Tax-Free Threshold apply?

The tax-free threshold applies to income earned within Australia by an Australian for tax purposes.

While you do need to declare foreign income on your Australian tax return if you are an Australian living overseas, this income may change the threshold applied to you.

What if…

My overall income is less than the threshold?

If you are sure your total yearly income from all employers/payers is less than $18,200, you are able to claim the tax-free threshold from each payer. In opting to do this, should your income later increase above the threshold, you need to then provide a new Withholding declaration to at least one of your employer/payers to stop claiming the threshold from them.

I have multiple jobs or employers/payers?

You may have income from two or more payers simultaneously. This includes situations like:

  • Holding two or more jobs; or
  • Receiving a taxable pension or government allowance alongside a regular part-time job.

If you have more than one payer, it is best to only claim the threshold from the payer providing you the highest salary or wage.

Your second or subsequent payer is then required to withhold tax at the higher (post-threshold) rate. This reduces the likelihood of you having a tax debt at the end of the financial year.

In some situations, your total withheld tax from all payers will be less or more than required to meet your end of year liability. You won’t be out of pocket as the amounts withheld are credited to at your tax return lodgement.

I am new to Australia, or only here for a part of the year

If you arrived to reside in Australia for a portion of the financial year, the tax-free threshold applied to you will be adjusted. This adjusted threshold will be lower than a full year’s threshold available to most resident taxpayers.

The adjusted threshold is made up of two parts:

  • A flat rate of $13,464
  • An additional $4,736 apportioned for the months spent in Australia including the month you arrived.

The Australian financial year runs from July 1 to June 30 the following year. Calculate the number of months from your arrival date until June 30.

If you are an Australian resident for tax purposes for a full year, you pay no tax on the first $18,200 of your income as normal.

I plan to leave Australia to live for the foreseeable future?

Within this context, being a foreign resident is the same as being a non-resident. Thus, if you are leaving Australia to reside overseas, your tax-free threshold for the year will lower.

You are entitled to a threshold amount of $13,464, plus an additional $4,736 apportioned for the months spent in Australia that financial year before departure.

Need help?

Our team at Online Tax Returns are here to assist you to get the most out of your tax return. As Australia’s leading online tax service, we pride ourselves on fast, easy service for every client. Contact us today!

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.