A Beginner’s Guide To The Tax-Free Threshold
If you have never submitted a tax return before, the first thing you need to do is determine the amount of your income that is exempt from taxation. This post will educate you on the fundamentals of this significant number and provide some pointers on how to maintain a high value for it.
The term “tax-free threshold” refers to an individual’s annual income that does not require them to make any tax payments on it. This means that nothing gained up until this point is liable to be taxed in any way at all!
Even though not everyone has to worry about taxes, there are many situations in which having some knowledge or experience concerning taxes can be helpful, such as when filling out forms or completing other paperwork for employment or other reasons.
There are a lot of folks who don’t give much thought to their taxes at all. If, on the other hand, you are one of the unlucky few who have to worry about it during the entire year, then you will find this article to be quite useful. It provides an in-depth explanation of the tax-free threshold and how it might have an impact on your day-to-day life.
Do you have any idea how much money you can make before you have to start paying taxes on it? If not, then keep reading! For the 2018-2019 fiscal year, the threshold at which one is no longer subject to taxation is $18,200.
This indicates that if your total income for the year is less than $18,200, you won’t owe any tax at all since you won’t be required to pay any tax. If, however, your total income is greater than $18,200, only the first $18,200 of that additional income will be subject to the standard 10% tax rate. That’s some fairly encouraging news, isn’t it?
If you plan on staying in Australia for an extended period of time, it is imperative that you familiarize yourself with the tax-free level. Because of the potential for it to have a significant impact on the total amount of tax money you wind up owing, becoming familiar with this notion as soon as you possibly can is highly recommended.
In Australia, the amount of money that can be earned tax-free each year is equal to $18,200 AUD. Because of this, whatever you earn that is less than this amount will not be included in the calculation of your taxable income. As a result, this is a fantastic opportunity to put away some additional cash at the end of each fiscal year!
In the 2018-2019 tax year, an individual’s taxable income threshold needs to be less than $18,200 for them to be eligible for a full refund from the Australian Tax Office (ATO). The sum shifts on an annual basis, so be sure to keep track of any new information as it becomes available.
The threshold may also be lower for you if you are older or if you have other dependents living with you at the same address. If an individual earns more than their threshold, the ATO will only give them a portion of their tax refund, and they may wind up repaying the government money.
Let’s get started!
Where can I find out about Australia’s tax-free threshold?
The amount of money that you can earn in a given fiscal year before being subject to income tax is referred to as the tax-free threshold.
The Australian Taxation Office (ATO) has said that the threshold at which a person is no longer subject to tax is $18,200. If you are an Australian resident for tax purposes, this indicates that the first $18,200 of your income each financial year is exempt from taxation; the point at which you begin to pay tax on your income is when it exceeds this threshold.
If you are a resident of Australia and have a tax file number, the tax-free threshold may allow you to minimize the amount of income tax that you are responsible for paying. This is how the process goes.
You are required to finish filling out a Tax File Number Declaration form whenever you begin working for a new employer. The next step is for you to let your new employer know that you wish to claim the tax-free threshold by responding “Yes” to the question “Do you want to claim the tax-free threshold from this payer?”
If you have more than one job and your total income is more than $18,200, you can only claim the tax-free level for one of those jobs. If your combined income is less than that amount, you can claim the threshold for all of your employment (normally the higher paying one).
If you claim for both jobs, your total tax withholding will be too low, and when you file your tax return at the end of the year, you will find that you owe money to the government.
Be wary of a potential tax trap that may be generated by the tax-free level if you are a taxpayer who has two or more sources of income.
As a result of the tax-free level, there is a possibility that certain taxpayers who have two or more occupations or other sources of taxable income will unintentionally fall into a tax trap.
Even if the taxpayer and the employers do everything correctly – according to the individual income tax rates determined by the Australian Taxation Office (ATO), the problem will still occur.
The problem arises due to the fact that the tax-free threshold only applies to the first employment, while the second job and any jobs that follow it are undertaxed. It is possible for taxpayers to be sent a tax bill at the conclusion of the fiscal year as a result of this.
How do I claim the taxable income exemption amount?
According to the explanations provided by the Australian Taxation Office (ATO), making a claim for the tax-free level is often not too difficult. This is the good news.
Whenever you start a new job or apply for a new Centrelink payment, you will be given a “tax file number declaration form” to fill out. All you need to do is answer “Yes” to the question “Do you want to claim the tax-free threshold from this payer? ” on the form. After that, the form will be sent back to the appropriate department for processing.
I have multiple jobs; am I allowed to claim the tax-free threshold on all of them?
In most cases, this is not the case because the accepted norm is to claim the tax-free level on only one job at a time.
People who have two or more sources of income in the same financial year are told by the Australian Taxation Office (ATO) that they can only claim the tax-free threshold from the payer who typically pays the highest salary or wage. This rule applies to people who have multiple income sources in the same year.
If you want to claim the tax-free threshold from each payer, you can do so only if you are absolutely convinced that the sum of your yearly income from all payers will be less than $18,200.
If, on the other hand, your income for the year comes to be greater than $18,200, you will need to fill out a withholding declaration form and give it to one of your employers to let them know that you will no longer be claiming the tax-free threshold from it. This will allow you to avoid paying taxes on the excess amount of income.
If you fail to do this, you run the risk of being undertaxed, which would require you to make up the difference at the end of the fiscal year by paying more tax.
If, on the other hand, you receive the tax-free threshold from only one employer, your second income stream as well as any additional sources of income above and beyond that will be taxed at the higher rate applicable to those who do not receive the tax-free threshold.
The ATO warns that this could potentially result in you being overtaxed during the year; however, any funds that were withheld in excess of what was required would be refunded to you at the end of the year in the form of a tax refund once you have completed and submitted your tax return.
What repercussions will result from my failure to claim the tax-free threshold?
If you do not make any claims against the tax-free threshold for a given fiscal year, you run the risk of being required to pay income tax on all of the money that you earn.
Since Australia’s income tax brackets and rates are based on the assumption that you do claim the tax-free threshold to avoid paying tax on the first $18,200 of your earned income, this would almost certainly result in you paying more tax than you need to during the course of the year.
Even though the ATO will most likely issue you a refund for the amount of tax that you have overpaid once you have completed and submitted your tax return, you will still be required to make additional payments of tax during the year.
If you have income from more than one payer
You might be getting paid simultaneously by two or more different payers if any of the following apply to you:
- hold down at least two jobs;
- hold down regular part-time employment while also receiving taxable retirement income or an allowance from the government.
We normally require that you only claim the tax-free threshold from one payer even if you have more than one payer at the same time. This is the case when you have several payers at the same time. We strongly advise going to the payer who typically hands out the highest salary or wage and requesting the tax-free threshold from them.
After that, a greater percentage of your income will be subject to tax withholding by your other payers. This is the rate that applies when there is no tax-free threshold. It is less likely that you will owe money to the government at the conclusion of the fiscal year as a result of this action.
It’s possible that the sum of the taxes deducted from all of your income will either be more or less than the entire amount you need to pay in order to satisfy your tax bill at the end of the year.
When you file your income tax return, the funds that were withheld for taxes will be paid back to you. Therefore, in the event that an excessive amount of tax was withheld, it is possible that this will result in a tax refund. However, in the event that not enough tax was deducted from your paycheck, you may be required to make up the shortfall by paying it to us. This will ensure that you have paid the appropriate amount of tax based on your income.
You have the possibility to submit a request to modify the amounts of tax that are withheld from your income in order to more closely match your tax liability at the end of the year:
- If your annual income is less than $18,200;
- If your income is more than $18,200 and you are having an excessive amount of tax withheld:
- if an insufficient amount of tax is withheld.
1. If your annual salary is less than $18,200.
You have the option to claim the tax-free threshold from each payer if you are convinced that the sum of your income for the year that will come from all of your payers will be less than $18,200. This decision is yours to make.
In the event that you carry out these steps, and your annual income eventually rises to a level that is higher than $18,200, you will be required to submit a withholding declaration to one of your employers. They will be informed through the withholding declaration that you do not wish to continue claiming the tax-free threshold from that payer.
2. If your annual income is more than $18,200 and an excessive amount of tax is deducted from it
You are eligible to submit a request to have the amount of tax withheld from your payments decreased if your annual income was greater than $18,200 and an excessive amount of tax was withheld during the tax year. It is necessary for you to complete a PAYG withholding variation application and then submits it to us.
When they receive your application, they will compute the variation amount and give your payers updated instructions for how much tax should be withheld from each paycheck. You should only submit an application for this modification if you are certain of the quantities of income you will be receiving and if the present withholding rates put you at a disadvantage.
3. If an insufficient amount of tax is withheld
There are situations in which the total amount of tax deducted from your payments is not sufficient to fulfil your tax liability for the taxable year.
You have the option of asking one or more of your payers to increase the amount of money they withhold from your payments in order to avoid having a tax liability at the end of the year. Your request must be made in writing, but it can be presented in any format you choose. You may, for instance, submit a request via e-mail, a paper form, or a form based on a computer.
If you live there for at least part of the year, you qualify
If you become or stop being an Australian resident for tax purposes during the course of the income year, you will be eligible for a tax-free threshold that applies only to the remaining portion of the year.
If you are not a resident of the country throughout the entire year, you are not eligible to make use of the tax-free threshold. This means that a tax is deducted from each and every dollar of income earned in Australia.
For example, the tax-free threshold for those who only live their part of the year
On April 17 of this year, John officially moved to Australia and became a resident there. This indicates that he has spent a total of three of the twelve months that comprise the income year in Australia.
The following is his tax-free threshold:
= $13,464 + (($4,736 × 3) ÷ 12)
= $13,464 + $1,184
Because of this, John will not be required to make any tax payments on the first $14,648 of his taxable income for the year. If he has taxable income that is greater than $14,648, he will be subject to a tax rate of 19 percent on that income. There will be no change to the thresholds that determine the other tax rates.
Because John’s tax-free threshold was lower than that of a resident for the entire year, he will be subject to a higher rate of taxation on the same amount of income if his taxable income is greater than $14,648. This occurrence only takes place once. John is eligible to claim the full tax-free level for consecutive years because he is now a resident for the entirety of those years.
The tax-free threshold for newcomers to Australia
When you arrived, did you bring with you the idea of making Australia your permanent home this year?
If you live in Australia for the entire year and meet the residency requirements for tax purposes, you are exempt from paying tax on the first $18,200 of your taxable income. This is referred to as the threshold for tax-free income.
Your tax-free threshold may be lowered if you plan to live in Australia at any point during the year for which the threshold is calculated. This is due to the fact that your taxable income level will be lower than the threshold that is available to the majority of resident taxpayers for the entire year.
Your individually adjusted tax-free threshold is comprised of two parts:
- a one-time payment of 13,464 dollars;
- an additional $4,736, which is calculated based on the total number of months, including the month you arrived, that you spent in Australia during the income year in question.
The beginning of the Australian financial year is on July 1 and continues all the way through June 30 of the following year. Because of this, you need to determine the number of months that will pass between the month in which you arrived and the 30th of June, which is the conclusion of the fiscal year.
How does the tax-free threshold apply to PAYG tax?
When preparing your annual tax return, it is helpful to be aware of the figure of $18,200 that constitutes the tax-free threshold for the year. Nevertheless, it is possible that it will not be of much assistance to you if you are trying to determine whether or not you are required to make pay-as-you-go (PAYG) tax instalment payments on your regular income.
Instead, it would be helpful to be aware of the corresponding tax-free cutoffs that apply to normal earnings. According to the numbers provided by the ATO, these are:
- If you get paid every week, you will have to pay taxes on any earnings that are more than $350.
- If you are paid every two weeks, you will be subject to taxation on any earnings that are greater than $700.
- If you are paid on a monthly basis, you will be subject to taxation on any earnings that are greater than $1,517.
You can estimate the amount of tax that you will owe on your annual income by using the income tax calculator, which is another option.
However, it is essential to keep in mind that in most cases, the tax-free threshold will not be applied immediately to the earnings you receive from your employer.
When you ask for a payment from Centrelink or start new employment, the ATO requires you to make a claim for this benefit before they will give it to you. In the event that this is not the case, your PAYG tax will begin to be computed from the very first dollar you earn, regardless of how much money you make.
Common tax-free threshold questions
1. Why is my refund less than it was last year, or why do I have a much larger amount of tax to pay than I expected?
Because the amount of income that is exempt from taxation was increased to $18,200, it is possible that your employer withheld less tax from your paycheck (and as a result, you received more money for each pay), which has resulted in a lower refund or a bill that must be paid.
This is especially true for taxpayers who hold more than one employment (and payment summaries). Because of the progressive nature of the tax rates, it is possible that the overall amount of tax that is withheld from your income will not be sufficient to meet the total amount of tax that is owed, even if each employer follows the ATO income tax rates correctly when calculating tax withdrawn.
2. What if I work more than one job?
It’s not uncommon for taxpayers to have their income come from a wide variety of sources; in fact, it’s rather typical. You might, for instance, have full-time work in addition to a part-time one, or you might earn a pension or a government allowance in addition to having full-time employment.
If you have more than one payer, you can only claim the tax-free level on one of your jobs, typically the one with the greatest salary or earnings. The second payer is obligated to make tax withholdings at the higher rate that applies when there is no tax-free threshold. Because of this, the risk of having an outstanding tax liability at the conclusion of the fiscal year is decreased.
3. Why does it seem like I’m paying more in taxes now that I have two jobs instead of just one?
Whether you earn your money through one job or several, it will not change the amount of tax that you are required to pay on that income.
When you file your income tax return at the end of the year, all of your income will be totalled together, and your tax burden will be calculated as a lump sum based on your combined income. The tax-free level may be to blame for the impression that you are required to pay a higher amount of tax on one of your jobs in comparison to the other.
In a nutshell, Australian residents are exempt from paying income tax on the first $18,200 of their annual earnings when it comes to tax purposes. This is referred to as the tax-free threshold, and it indicates that you will not be required to pay taxes on the first $350 a week or $700 a fortnight of income that you receive from your employer.
You are only allowed to make this claim to one employer at a time, which implies that you are unable to make this claim to any further employers in the future.
If you did that, it would be considered double-dipping, and you would wind up with two different tax-free levels, which would result in increased tax liability at the end of the year. You can alternatively claim the tax-free threshold from each payer if you are positive that the sum of your annual income from all employers or payers will be less than $18,200. This certainty is required for you to be able to make this claim.
Because you do not claim the tax-free level from your second employer, all income you receive from them will be taxed beginning with the first dollar. You will not be eligible for any tax-free amount from this employer because you do not claim the threshold. It’s possible that this is why you get the impression that you’re paying more in taxes when you have a second job.
4. Can you explain the term “taxable income”?
Your taxable income is the amount of money that is left over after all of the costs associated with earning that income has been subtracted. To determine the amount of income that will be subject to taxation, you will need to first total up all of the qualified claims you have made and then deduct that amount from the amount of income that you have generated during the current fiscal year.
The amount that is subject to taxation after this calculation is known as your taxable income. Taking advantage of every deduction for which you are qualified might cut the amount of income tax you owe.
5. I need to know how to pay my income tax.
If you work for an employer, then a portion of your wages or pay will be withheld on a regular basis to cover your income tax obligations. Your employer is obligated to make direct payments of your taxes to the Australian Taxation Office (ATO) using their accounting software at the beginning of each pay period.
If you receive money from sources other than your employers, such as bank interest, shares, or property, you are responsible for keeping your own financial records and reporting that income.
You will be required to submit an income tax return on an annual basis. Your tax agent will be able to access your income as well as any taxes that have already been withheld from your paycheck by your employer; nevertheless, you will be responsible for disclosing any additional sources of income to your tax agent.
If your employer has paid a sufficient amount of tax on your behalf, you may be eligible to get a tax return after the necessary deductions have been made.
6. What can I do to prevent something like this from happening to me again in the following year?
In order to make up the difference, you should ask one of your employers to increase the amount of tax that is withheld from your paychecks. Make the necessary arrangements by contacting your company’s payroll department. Your tax expert will be able to provide you with information regarding the amount of the deficit that will apply to each pay period based on this year’s taxes.
Get in touch with the office that’s closest to you and explain how much money you’ve made from each work as well as how much tax you’ve already paid. They’ll be able to tell you if there’s a gap in your payment, and you’ll be able to make up the difference as you go along.
7. Who is required to submit a tax return?
Even if your income is below the threshold, you are still required to file a tax return because it is a legal requirement. These are the following:
- residents of Australia whose annual income is higher than the tax-free level of $18,200 for that year’s income calculation;
- Any resident taxpayer with an annual income of less than $18,200 who has had tax withholding performed by their employer for the current tax year;
- Every person who, for-profit or not, engages in self-employment in some capacity is considered to fall under this category.
8. When is the deadline for me to submit my tax return?
You have until the 31st of October to submit your tax return, but you must do so between the 1st of July and the 31st of October (the last day for lodgement). However, if you employ a tax professional to file your return, you may be eligible for a deadline extension (up to the 15th of May).
In the event that you need to submit an application for an extension, you should get in touch with the ITP Tax Accountant who is located closest to you.
It is not too late to file your taxes even if you missed the deadline, but you shouldn’t forget about it totally. When it comes to overdue tax returns, the ATO has severe fines and penalties.
Working with a tax consultant can help you minimize the impact of these fines and find your way through the complexities of filing your taxes late.
9. At this time, I am not able to pay the tax bill that I owe. What action should I take?
Some jurisdictions allow you to postpone the deadline for filing your tax return until the following year. You will, however, be required to complete the tax return, and we will hold it for lodgement in May or on the date that the ATO specifies as being your due date for lodgement.
10. In order to claim my tax deductions, what do I need to do?
It is in your best interest to file for as many tax deductions as possible for the money you have spent on things related to your work, as doing so can significantly reduce the amount of income tax you owe. When people file their tax returns, they frequently discover that they are eligible for a tax refund for one of these reasons.
Imagine that in order to obtain your wage, you have had to shell out money for things like buying and cleaning uniforms, paying for trips and meals, or continuing your education, among other things. If this is the case, then you might be able to deduct those expenses from your taxable income.
Keep in mind that you can only deduct costs associated with your work. You are not allowed to deduct any of your personal costs from your taxable income.
You can ask your tax adviser for assistance in determining all of the deductions you are eligible for if you are unsure of what you are able to claim on your taxes. In addition, the top tax agents will frequently be able to determine deductions for which you were unaware you were eligible to make a claim.
11. What happens if I find new employment over the course of the current fiscal year? Is it possible for me to still qualify for the tax-free threshold?
Yes, at any moment you can switch the employer that the tax-free threshold is claimed from on your tax return. Everything will be alright so long as you make sure you are only claiming it from one employer at a time.
You are only allowed to claim the tax-free threshold from one employer at a time; therefore, if you switch jobs, you will be required to stop claiming it from the employer you are no longer working for, but you are free to claim it from the employer you are now working for.
When you stop working for an employer, you do not need to explicitly notify them that you are no longer claiming the tax-free threshold with them. Instead, as soon as they stop paying you, they will stop granting you any tax-free amounts because you are no longer receiving income from them.
You will be required to fill out a new tax file number declaration when you begin working for your new employer. When asked about the tax-free threshold, you will have the option to answer “yes” in order to claim it through your new employer.
As long as you are only claiming the tax-free threshold through a single employer at any given time, there is no limit to the number of times you can adjust your tax-free threshold.
12. I am currently employed in two separate part-time jobs. Should I expect to be subject to a higher tax rate now that I have a second job?
There is no additional tax liability associated with holding a second job. You will be subject to the same level of taxation on your income regardless of whether you bring in money from a single job or several different jobs.
Therefore, whether you earn $1,000 each week from a single company or from several different companies, the amount of tax that you are responsible for paying will remain the same.
When you file your income tax return at the end of the year, all of your income will be brought together, and we will calculate the amount of tax that you are required to pay based on your combined income.