What is the tax-free threshold in Australia?

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on December 23, 2021
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What is the tax-free threshold in Australia?

Tax. We all love complaining about having to pay it, but it has a big impact on your personal finances, so it’s important to know how it works.

One aspect of taxes that you need to understand is the tax-free threshold. In Australia, you’re required to pay tax on your income if you’re an Australian resident, earn an income and have a tax file number (TFN).

But the tax-free threshold is one factor that determines how much tax you have to pay (if any at all), and it can also impact how big your tax refund is - or whether you’re left with a big nasty tax bill.

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            What is the tax-free threshold?

            The tax-free threshold is a certain amount of money you can earn each financial year without having to pay any tax on it. According to the Australian Taxation Office (ATO) the tax-free threshold is $18,200. So if you’re an Australian resident, the first $18,200 of your annual income is completely tax-free.

            The $18,200 tax-free threshold is equivalent to:

            • $350 a week

            • $700 a fortnight

            • $1,517 a month

            Australia has what’s known as a progressive tax system where the more you earn, the more tax you pay. If your annual income is above $18,200, your income then falls into one of these tax brackets:

            Resident tax rates 2020–21:

            Taxable income

            Tax paid on this income

            0 – $18,200

            Nil

            $18,201 – $45,000

            19 cents for each $1 over $18,200

            $45,001 – $120,000

            $5,092 plus 32.5 cents for each $1 over $45,000

            $120,001 – $180,000

            $29,467 plus 37 cents for each $1 over $120,000

            $180,001 and over

            $51,667 plus 45 cents for each $1 over $180,000

            Source: ATO *The above rates do not include the Medicare levy of 2%.

            If you’re not an Australian resident, unfortunately you aren’t eligible to claim the tax-free threshold and you will have to pay tax on every dollar of income you earn in Australia.

            What counts as income?

            The ATO defines income that must be declared for tax purposes as:

            • Employment income

            • Super pensions and annuities

            • Government payments and allowances

            • Investment income (including interest, dividends, rent and capital gains tax)

            • Business partnership and trust income

            • Foreign income

            • Other income including compensation and insurance payments, discounted shares under employee share schemes, and prizes and awards

            You also need to declare any money or earnings you receive from:

            • Crowdfunding

            • The sharing economy and tax

            • Personal services income relating to labour-hire payment

            How to claim the tax-free threshold

            Claiming the tax-free threshold is easy. When you start a new job, your employer will give you a tax file number declaration form to fill out. To claim the tax-free threshold all you have to do is answer ‘yes’ to question 9 - ‘Do you want to claim the tax-free threshold from this payer?’ The same applies if you’re on Centrelink payments.

            Your employer won’t automatically calculate how much tax you owe using the tax-free threshold for you, so it’s really important that you claim it on your tax file number declaration form every time you start a new job.

            Can I claim the tax-free threshold if I have more than one job?

            If you have more than one job or receive a taxable pension or government allowance on top of a regular part-time job, it’s advised to only claim the tax-free threshold for one of those jobs. According to the ATO, “if you have more than one payer at the same time, we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage”.

            Your other income streams will then be taxed at a higher ‘no tax-free threshold’ rate. This reduces the chances of you winding up with a big tax bill at the end of the financial year because you could be overtaxed, but you will receive this money back in your tax refund at the end of the financial year anyway.

            If you’re certain that your total annual income from all your jobs will be $18,200 or less, you can choose to claim the tax-free threshold from each payer. However, if your total annual income later increases above $18,200 you’ll have to give one of your employers a withholding declaration to stop claiming the tax-free threshold from them.

            On the other hand, if your income is over $18,200 and too much tax is withheld, you can apply to reduce the amount of tax withheld from your payments so you receive extra pay during the year rather than receiving a big tax refund at the end of the year. To do this, you’ll have to complete and lodge a PAYG withholding variation application with the ATO.

            One trap that people with multiple incomes can find themselves in is they claim the tax-free threshold for one job and the subsequent jobs/incomes are undertaxed, meaning they’re left with a tax bill at the end of the year. To avoid this, the ATO says you can “ask one or more of your payers to increase the amount they withhold from your payments”.

            What happens if I don’t claim the tax-free threshold?

            If you don’t claim the tax-free threshold, you’ll have to pay tax on your entire earnings regardless of how much money you make (yep - even if it’s less than $18,200).

            Some people purposely elect not to claim the tax-free threshold as a ‘tax-free threshold savings strategy’, which means they’re paying more in tax during the year but are pretty much guaranteed to receive a bigger tax refund at the end of the year. Those who aren’t very good at saving money like to use this as a means of forced savings but it does mean you’re financially worse off during the year as your take-home pay will be smaller.

            Savings.com.au’s two cents

            The tax-free threshold may not be the most exciting topic ever, but it can have a big impact on your personal finances. This is because claiming it (or not claiming it) directly influences how much tax you pay on every dollar you earn, and can impact how much you get back at tax time.

            Article originally written by Emma Duffy on 27 October 2020, updated by Rachel Horan on 23 December 2021


            Photo by The New York Public Library on Unsplash

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            Emma Duffy is Assistant Editor at Your Mortgage and  Your Investment Property Mag, which are part of the Savings Media Group. In this role, she manages a team of journalists and expert contributors committed to keeping readers informed about the latest home loan and finance news and trends, as well as providing in-depth property guides. She is also a finance journalist at Savings.com.au which she joined shortly after its launch in early 2019. Emma has a Bachelor in Journalism and has been published in several other publications and been featured on radio.

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