A Beginner’s Guide To The Tax-Free Threshold
If you’ve never filed a tax return before, the first thing you need to know is what your tax-free threshold is. This post will walk you through the basics of this important number and give some tips on how to keep it high.
The tax-free threshold refers to a yearly income that’s exempt from paying any taxes on it. This means that anything earned up until this limit isn’t subject to taxation at all!
Whilst not everyone has to worry about taxes, there are still plenty of ways in which having some knowledge or experience can come in handy when filling out forms or doing other paperwork for work etc.
For many people, tax is the furthest thing from their minds. However, if you are one of the unlucky few who have to worry about it year-round, this article will be very informative for you. It explains in detail what the tax-free threshold is and how it can affect your daily life.
Do you know how much money you can earn before paying any taxes? If not, read on! The tax-free threshold is $18,200 for the 2018/2019 financial year.
This means that if your total income this year is less than $18,200, then you won’t pay any tax at all. However, if your total income exceeds $18,200, then up to $18,200 of it will be taxed at just 10%. That’s pretty good news, right?
The tax-free threshold is a really important thing to know about if you’re going to be in Australia for a while. It can have big implications on how much money you end up paying in taxes, and that’s why it’s good to get acquainted with this concept as soon as possible.
In Australia, the tax-free threshold is $18,200 AUD per year. This means that anything you earn below this amount does not count towards your taxable income, which makes it an excellent way of saving some extra cash at the end of each financial year!
In order for an Australian to be entitled to a full refund from the ATO (Australian Tax Office), they must have earned below $18,200 in 2018/2019. The amount changes every year, so make sure to take note of any updates that happen!
The threshold can also decrease depending on your age or if other dependents are living with you. If someone earns over their threshold, they will only receive a partial refund from the ATO and could end up owing them.
Let’s get started!
What is the tax-free threshold in Australia?
The tax-free threshold is the amount of money you can earn each financial year without needing to pay tax.
According to the Australian Taxation Office (ATO), the tax–free threshold is $18,200. This means if you’re an Australian resident for tax purposes, the first $18,200 of your income each financial year is tax-free, and you only pay tax if you earn above this amount.
If you’re an Australian resident with a tax file number, the tax-free threshold could help reduce how much income tax you need to pay. Here’s how it works.
When you start work for a new employer, you must complete a Tax File Number Declaration form. Then, you advise your new employer that you want to claim the tax-free threshold by answering “Yes” at question 9 ‘Do you want to claim the tax-free threshold from this payer?’
If you have more than one job and your combined income exceeds $18,200, you can only claim the tax-free threshold for one of those jobs (normally the higher paying one).
If you claim for both jobs, not enough tax will be deducted, and you will have a tax debt at the end of the year when you lodge your tax return.
Taxpayers with two or more income sources – beware of a possible tax trap caused by the tax-free threshold.
Some taxpayers with two or more jobs or other taxable income sources may be caught in an unintentional tax trap as a result of the tax-free threshold.
The problem occurs even if the taxpayer and the employers do the right thing – as determined by the Australian Taxation Office (ATO) individual income tax rates.
The problem is caused as the first job attracts the tax-free threshold while the second and subsequent jobs are undertaxed. This means that taxpayers can be left with a tax bill at the end of the financial year.
How do I claim the tax-free threshold?
Whenever you start a new job or apply for a new Centrelink payment, you’ll be given a ‘tax file number declaration form to complete, and all you have to do is answer ‘Yes’ to the question ‘Do you want to claim the tax-free threshold from this payer?
Can I claim the tax-free threshold on more than one job?
Generally, not – standard practice is to only claim the tax-free threshold on one job at a time.
The ATO says that in the case of people with two or more income sources in the same financial year, “we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage”.
Only if you’re certain your total annual income from all payers will be less than $18,200 can you claim the tax-free threshold from each payer.
However, if your income ends up being more than $18,200 for the year, you would need to fill out a withholding declaration form and give it to one of your employers to tell them you aren’t claiming the tax-free threshold from it anymore.
If you don’t do this, you may end up being undertaxed, which would mean you have to pay extra tax at the end of the financial year.
On the other hand, if you claim the tax-free threshold from only one employer, your second income stream and any other sources of income beyond that will be taxed at the higher, ‘no tax-free threshold’ rate.
The ATO notes that this may possibly lead to you being overtaxed during the year but that any excess withheld funds will be returned to you at the end of the financial year in the form of a tax refund once you do your tax return.
What happens if I don’t claim the tax-free threshold?
If you don’t claim the tax-free threshold at all for a financial year, then you may have to pay income tax on all the money you make.
This would most likely result in you paying more tax than you need to during the year since Australia’s income tax brackets and rates assume you do claim the tax-free threshold to avoid paying tax on the first $18,200 you earn.
The ATO will most likely give this overpaid tax back to you as a refund once you do your tax return, but this would still mean you pay more upfront tax during the year.
The ATO adds that you can fill out a PAYG withholding variation application form if you want to reduce how much tax gets taken out of your pay packet in the future.
If you have income from more than one payer
You may be receiving pay from two or more payers at the same time if you:
- have two or more jobs
- have a regular part-time job and receive a taxable pension or government allowance.
If you have more than one payer simultaneously, we generally require that you only claim the tax-free threshold from one payer. We recommend claiming the tax-free threshold from the payer who usually pays the highest salary or wage.
Your other payers then withhold tax from your income at a higher rate. This is the ‘no tax-free threshold’ rate. This reduces the likelihood of you having a tax debt at the end of the financial year.
Sometimes the total tax withheld from all sources may be more or less than the amount you need to meet your end-of-year tax liability.
These tax withheld amounts are credited to you when you lodge your income tax return. Therefore, if too much tax was withheld, it might result in a tax refund. However, if not enough tax was withheld, you may need to pay the difference to us so that you have paid enough tax for your income.
You can apply to change the amounts of tax withheld from your income to more closely match your end-of-year tax liability:
- If your income is $18,200 or less
- If your income is over $18,200 and too much tax is withheld
- If too little tax is withheld
1. If your income is $18,200 or less
If you’re certain your total income for the income year from all your payers will be $18,200 or less, you can choose to claim the tax-free threshold from each payer.
If you do this and your total income later increases to above $18,200, you’ll need to provide one of your employers with a withholding declaration. The withholding declaration will advise them you want to stop claiming the tax-free threshold from that payer.
2. If your income is over $18,200 and too much tax is withheld
If your income is more than $18,200 and too much tax was withheld in the income year, you can apply to reduce the amount of tax withheld from your payments. You will need to complete and lodge a PAYG withholding variation application with us.
They’ll calculate the variation amount when they receive your application and provide your payers with new instructions for withholding your tax. You should only apply for this variation if you’re certain of your income amounts and are disadvantaged by the current withholding rates.
3. If too little tax is withheld
Sometimes the total tax withheld from your payments may be too little to cover your tax liability for the income year.
To avoid end-of-year tax debt, you can ask one or more of your payers to increase the amount they withhold from your payments. Your request should be in writing but can be in any format. For example, you can send an email request, a paper or a computer-based form.
If you’re a resident for part of the year
If you become or cease being an Australian resident for tax purposes during the income year, you will receive a part-year tax-free threshold.
If you’re a non-resident for the full income year, you can’t claim the tax-free threshold. This means you pay tax on every dollar of income you earn in Australia.
Example – the tax-free threshold for part-year resident
John became an Australian resident on the 17th of April this year. This means he has been in Australia for three of the twelve months in the income year.
His tax-free threshold is:
= $13,464 + (($4,736 × 3) ÷ 12)
= $13,464 + $1,184
This means John will not pay tax on the first $14,648 of his taxable income for the income year. For any taxable income over $14,648, he will start to pay tax at the rate of 19%. The thresholds for the other tax rates will not change.
As John had a lower tax-free threshold than a resident for a full year, he will pay more tax on the same income if his taxable income exceeds $14,648. This only happens once. For subsequent years, John is a resident for the full year and is entitled to the full tax-free threshold.
The tax-free threshold for newcomers to Australia
Did you arrive with the intention to reside in Australia this year?
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. This is called the tax-free threshold.
If you intend to reside in Australia during the financial year, your tax-free threshold would be adjusted. This is because your tax-free threshold will be lower than the full year’s threshold available to most resident taxpayers.
Your adjusted tax-free threshold has two components:
- a flat amount of $13,464
- an additional $4,736 – apportioned for the number of months you were in Australia during the income year, including the month you arrived.
The Australian financial year runs from the 1st of July to the 30th of June the following year. Therefore, you need to calculate the number of months from the month you arrived until the 30th of June, the end of the income year.
How does the tax-free threshold apply to PAYG tax?
The yearly tax-free threshold figure of $18,200 is useful to be aware of when you’re doing your annual tax return. Still, it may not be particularly helpful if you want to figure out whether you need to make pay-as-you-go (PAYG) tax instalment payments on your regular income.
Instead, the equivalent tax-free cutoffs that apply to regular earnings could be useful to know about. Based on ATO figures, these are:
- If you’re paid weekly, you’ll pay tax on any earnings above $350.
- If you’re paid fortnightly, you’ll pay tax on any earnings above $700.
- If you’re paid monthly, you’ll pay tax on any earnings above $1,517.
You can also use the income tax calculator to get an idea of the tax you’ll pay on your annual income.
It’s important to note, however, that your employer typically won’t automatically apply the tax-free threshold to your earnings.
As the ATO states, it’s something you have to actively claim when you start a new job or apply for a Centrelink payment. Otherwise, PAYG tax will be calculated from the first dollar, regardless of how much or how little you earn.
Common tax-free threshold questions
1. Why is my refund lower than last year, or why do I have a surprising amount owing?
Since the tax-free threshold was raised to $18,200, you likely had less tax withheld by your employer (and therefore received more money for each pay), which has resulted in a smaller refund or a bill payable.
This is particularly the case for taxpayers with multiple jobs (and payment summaries). Even if each employer follows the ATO income tax rates properly to calculate tax withheld, the total tax paid on your income may not be enough to cover the tax payable because of the progressive tax rates.
2. What if I have two jobs?
It’s quite common for taxpayers to derive their income from a variety of sources. For example, you may have two jobs or receive an income from a pension or government allowance combined with a part-time job.
If you have more than one payer, the tax-free threshold can only be claimed on one job, usually from the highest salary or wage. The second payer is required to withhold tax at the higher, ‘no tax-free threshold’ rate. This reduces the likelihood of having a tax debt at the end of the financial year.
3. Why does it feel like I pay more tax on my second job than my first job?
You will end up paying the same tax on your income, irrelevant if you earn it through one employer or many.
At the end of the year, when you do your income tax return, all of your income will be added together, and we will calculate your tax liability based on your combined income as a lump sum. The reason it might feel like you pay more tax on one job than the other could be because of the tax-free threshold.
Basically, Australian residents for tax purposes receive the first $18,200 they earn tax-free each year. This is known as the tax-free threshold and equates to receiving the first $350 a week or $700 a fortnight income tax-free from your employer.
You can only claim this from one employer at a time, which means you cannot claim this from a second or subsequent employer.
If you did, it would be double-dipping, and you would end up getting two tax-free thresholds and probably a tax bill at the end of the year. So instead, if you’re certain your total annual income from all employers or payers will be less than $18,200, you can claim the tax-free threshold from each payer.
As you don’t claim the tax-free threshold from your second employer, any income you receive from them will be taxed from the first dollar – you won’t receive any amount tax-free amount from this employer. This might be why it feels like you are paying more tax on a second job.
4. What is ‘taxable income’?
Taxable income is the amount left over after your expenses to earn your income has been deducted. To calculate the income, you will be taxed on, you’ll need to add up your eligible claims and then subtract that from your income earned during the financial year.
The result is your taxable income and the amount you’ll need to pay tax on. Claiming all of your eligible deductions can considerably reduce your income tax.
5. How do I pay income tax?
Your income tax will automatically be withdrawn from your wage or salary if you work for an employer. Your employer is required to pay your tax to the Australian Taxation Office (ATO) directly with each pay period through their accounting software.
If you earn an income separately from your employers, such as from bank interest, shares or property, you’ll need to account for that income yourself.
Each year, you’ll need to complete an income tax return. Your tax agent will be able to access your income and tax already deducted from your employer, but you’ll need to let your tax agent know if you have other streams of income.
Sometimes, your employer will have paid enough tax on your behalf, and after deductions are made, you’ll receive a tax return.
6. What can I do to make sure this doesn’t happen to me again next year?
Have one of your jobs deduct a greater amount of tax each pay period to cover the shortfall. Contact your payroll department to arrange this change. Your tax consultant can advise you of the shortfall amount per pay period based on this year’s tax.
Contact your nearest office and advise how much you have earned from each job and how much tax you have paid, and they can let you know any shortfall, and you can adjust what you pay as you go.
7. Who has to lodge a tax return?
All taxpayers will need to lodge a tax return, even if you earn under the threshold. This includes:
- Australian residents whose total income exceeds the $18,200 tax-free threshold for the income year
- Any resident taxpayer earning less than $18,200 who has had tax withheld for the income year through their job
- Every individual carrying on a business or professional regardless of income or loss
8. When do I need to lodge my tax return?
You’ll need to lodge your tax return between the 1st of July to the 31st of October (the last day for lodgement). However, extensions may be granted if you use a tax agent to lodge your return (up to the 15th of May).
Contact your nearest ITP Tax Accountant to discuss your lodgement date if you need to apply for an extension.
If you miss the tax deadline, it’s not too late – but don’t forget it entirely. The ATO has stiff fines and penalties for late tax returns.
Working with a tax agent can help you minimise these penalties and help you navigate late tax return waters.
9. I cannot afford to pay my tax bill right now. What should I do?
Some can defer your tax return for lodgement until the due date next year. However, you will need to finalise the tax return, and we will hold for lodgement in May or your due lodgement date according to the ATO.
10. How can I claim my tax deductions?
It’s a good idea to claim as many tax deductions as you can on expenses you have incurred for your job, as it can drastically reduce your income tax. This is often the reason why people receive a tax refund when they lodge their tax returns.
Suppose you have spent money to earn your income, such as purchasing and cleaning uniforms, paying for travel and meals, or ongoing educational expenses. In that case, you may be entitled to claim that cost as a tax deduction.
Remember, you can only claim work expenses. Personal expenses cannot be deducted against your taxable income.
If you’re not sure what you can claim, you can ask your tax agent and they will help you work out all of your tax deductions. In addition, the best Tax Agents will often be able to work out deductions you didn’t know you could claim!
11. What if I have changed jobs during the financial year. Can I still claim the tax-free threshold?
Yes, you can change which employer you claim the tax-free threshold from at any time. As long as you ensure you are only claiming it from one employer at a time, it will be fine.
You can claim the tax-free threshold from one employer at a time, so if you change employers, you will stop claiming it from the employer you left, and you can choose to claim from your new employer instead.
If you stop working for an employer, you do not need to end claiming the tax-free threshold with them formally – when they stop paying you, they will stop giving you any tax-free amounts as you are no longer earning income from them.
When you commence work with your new employer, you will fill out a new tax file number declaration, and you can select ‘yes’ to the tax-free threshold to claim it through your new employer.
There is no limit to how many times you can change your tax-free threshold, as long as you are only claiming it through one employer at a time.
12. I work two different part-time jobs. Do I have to pay a higher rate of tax on my second job?
No, you don’t pay extra tax for having a second job. You will pay the same amount of tax on your income whether you have one single job or multiple jobs.
So if you earn $1000 a week from a single employer or from multiple employers, the tax you need to pay will be the same.
At the end of the year, when you do your income tax return, all of your income will be added together, and we will calculate the tax you need to pay based on your combined income.