In 2021 Tax Tips

Do you know how much money you can earn per year before having to pay tax? If not, don’t worry. We’ve got your back! The Australian Taxation Office is the government department that oversees taxation in Australia. 

They publish an annual list of what they call the “tax-free threshold”. This means that Australians are able to earn up to this amount per year without having to pay any income tax on it. 

Do you know what the tax-free threshold is in Australia? It’s $18,200 for an individual and $36,000 for a couple. If your taxable income falls below this amount, then no tax will be payable.

Some people may think that they don’t need to worry about their taxes until it reaches this level, but there are other ways to reduce your taxable earnings. 

For example, if you’re self-employed, you can claim deductions against business expenses such as phone bills and petrol costs; these deductions can lower your income by as much as 30%. 

You might also want to start looking into a superannuation (a retirement fund), which has special benefits like paying no tax on earnings on contributions up to $25,000 annually.

In Australia, the tax-free threshold is $18,200. This means that every time you earn or spend more than this amount of money in a year, you need to pay income tax on it. 

If your annual income falls below the tax-free threshold and you do not have any other sources of taxable income, then you are eligible for a range of government benefits, including Newstart Allowance; Parenting Payment Single; Age Pensioner Couple/Partner Alone; Widow Allowance; Carer Payment – Disability Support Pension Recipient (Long Term); Mature Age Allowance.

However, this does not mean that they will pay no taxes at all; rather, it means their first AUD 18,200 in earnings will be free from taxation. 

If you do not meet the requirements for the tax-free threshold and make more than your country’s limit each year (in Australia’s case, AUD 18020), then you’ll be taxed on every dollar you make over that limit. 

To learn more about what we’re talking about and how it may affect you personally, check out our blog post!

What is the tax-free threshold?

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 if you’re left with a big tax bill.

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

If you earn less than $18,200, you’ll still need to file a tax return, but you can claim the tax-free threshold. If you have paid tax during the year and have earned below $18,200, you will be eligible for a tax return.

If you’ve claimed the tax-free threshold and earned over $18,200, you will need to pay tax on the excess, which will be worked out at your end-of-year tax return. 

Australia has what’s known as a progressive tax system where the more you earn, the more tax you pay. 

Australia has a progressive tax system, which means that the more income you earn, the higher tax you pay. There are different tax brackets for residents, children, holidaymakers and foreign residents. You will also be required to pay a 2% levy on Medicare after tax.

Unfortunately, if you’re not an Australian resident, you aren’t eligible to claim the tax-free threshold. Instead, 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

Australia has a progressive tax system; this means that the more you earn – the more tax you’re required to pay. So naturally, income tax rates will vary between residents, children, foreign residents, and holiday workers. 

There are also (of course) some factors that can influence how much you’ll have to pay come tax time, and the tax-free threshold is a big one.

Basically, the tax-free threshold reduces how much tax is withheld from your pay each year.

Tax Withholdings

All employers must withhold payments from their employees and provide the money withheld to the Australian Taxation Office (ATO). 

This is known as pay as you go (PAYG) withholding. In practice, this helps employees pay their taxes over the financial year instead of having one big payment to make at the end of the financial year.

When you commence work with your employer, you will need to complete a tax file number declaration, which will help your employer determine what they will need to withhold from your pay. 

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Things the employer will consider are whether you:

  • are claiming the tax-free threshold; and
  • have a HECS-HELP loan to repay.

If you would like to vary your employer’s withholding and adjust the amounts to be withheld, you should complete a withholding variation declaration. This may occur when, for example, your tax residency changes.

Australian Residents for Tax Purposes

Only Australian residents for tax purposes can claim the tax-free threshold. If you are a non-resident for tax purposes during the relevant income year, you cannot claim the tax-free threshold and are required to pay tax from the first dollar you receive.

An Australian resident for tax purposes is different from a ‘resident’ under immigration laws. While your immigration status may deem you a resident, you may still not be a resident for tax purposes. It is important to know if you are an Australian resident for tax purposes, as this affects your:

  • tax liabilities; and
  • eligibility to claim the tax-free threshold.

If you are living in Australia, it is likely that you are an Australian resident for tax purposes. Similarly, if you are working in Australia, you will probably be considered an Australian resident for tax purposes. 

So, unless you are leaving Australia permanently, you will likely be eligible to claim the tax-free threshold. The ATO’s residency calculator will help clarify your residency status for tax purposes.

How to claim the tax-free threshold

The current tax-free threshold set by the ATO is $18,200. So, if you’re considered an ‘Australian resident’ for tax purposes, the first $18,200 of your yearly income doesn’t have to be taxed.

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.

When you start a new job, you’ll have to fill out a Tax File Number Declaration Form for your employer. On this form, you’ll be able to opt-in for the tax-free threshold by answering ‘Yes’ to the question ‘Do you want to claim the tax-free threshold from this payer?’

Centrelink is also considered a ‘payer’ by the ATO and will also need you to complete this form if you apply for their payments.

Part Residents

You are only eligible to claim the tax-free threshold if you are a current Australian resident for tax purposes. In addition, part residents can only claim the tax-free threshold for the amount of time that they lived and worked in Australia.

For example, if you were living and working in Australia for part of the year and left Australia with the intention to reside elsewhere permanently, you would only be entitled to claim the tax-free threshold for the part of the year you resided in Australia.

If you were a resident for part of the year, your tax-free threshold is a minimum of $13,464. The remaining threshold is calculated on a pro-rata basis, based on the number of months that you were an Australian resident for tax purposes.

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

Generally, if you have more than one source of income, the ATO will only allow you to claim the tax-free threshold from the highest paying source. 

If you receive income from various sources, you are still eligible to claim the tax-free threshold. However, you should only claim the threshold from one employer at a time. Usually, this is the employer that pays you more throughout the financial year.

Subsequent employers will still withhold taxes, but will not account for the tax-free threshold, thereby withholding tax from the first dollar they pay you.

Other streams of income will have to withhold tax from your pay at a higher rate. The ‘no tax-free threshold’ rate can change, depending on your circumstances. You can apply to change how much tax is withheld from your other sources of income if:

  • your income is $18,200 or less
  • your income is over $18,200, and too much tax is withheld
  • too little tax is withheld

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”.

Should you claim it?

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When it comes to claiming the tax-free threshold, there aren’t really any disadvantages worth noting. 

Whether or not you claim the threshold will affect the level of PAYG tax that your employer will take out of your regular pay. Tax-free income for most people will always be a bonus.

Although you can claim further deductions in your tax return, the tax-free threshold is a simple way of ensuring you pay less tax come to the end of the financial year.

As a result, virtually everyone has something to gain from the tax-free threshold, regardless of their income size.

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 total 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.

How tax applies to your super

While we’ve got you here, let’s quickly touch on tax and super. The tax-free threshold is not inclusive of your superannuation payments

How your super will be taxed depends on your age, contributions, and other factors. As a result, it’s super (see what we did there?) important you understand how different tax implications may affect your nest egg.

Your super is usually taxed at a lower rate than your personal income. The money you invest into your superannuation fund can be taxed at four different points:

  • Super contributions: when the money goes in
  • Investment earnings: while it’s in your fund
  • Super benefits: when you withdraw it
  • Super death benefits: when you die

Ultimately, the ATO will treat your superannuation savings very differently depending on which point it’s at. However, since everyone’s situation is so different, it’s always good to get advice about your tax. 

Refer to the Australian Taxation Office (ATO) for more info, and get in touch with a financial adviser if you need more clarification.

Five ways to save tax using superannuation

1. Salary sacrifice

You can ask your employer to pay some of your salary into your super. This salary sacrifice is usually on top of the Superannuation Guarantee minimum percentage payments that your employer is obliged by law to contribute.

It’s important to check how your employer treats salary sacrifice contributions before putting this strategy in place.

What’s the tax concession?

Your salary is sacrificed straight into your super, so it’s taken from your gross (before-tax) pay. This means it’ll be taxed at 15% unless you’ve exceeded the concessional contributions cap.

From 1 July 2017, if you earn more than $250,000 a year, you may be subject to an additional 15% tax.

There’s a limit to how much you can contribute to your superannuation that is concessionally taxed. You can find the most up-to-date information on contributions caps on the Australian Taxation Office (ATO) website.

Keep in mind that, unlike the employee super guarantee, salary sacrificing isn’t something employers are obliged to offer. You’ll need to speak with your employer to check if it’s an option available to you.

2. Government co-contribution

How much you earn and contribute to your super determines whether you’re entitled to receive a government co-contribution and, if so, how much. The maximum co-contribution is $500 each year you’re eligible.

What’s the tax concession?

A Government co-contribution isn’t included as part of your taxable income, so you don’t pay any tax on it when it’s paid into your super.

3. Personal super contributions

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You can boost your super by adding your contributions to your super fund or into your spouse’s super fund.

Personal super contributions are the amounts you contribute to your super fund from your after-tax income (that is, from your take-home pay).

These contributions:

  • Are in addition to any compulsory super contributions your employer makes on your behalf
  • Don’t include super contributions made through a salary sacrifice arrangement.

Personal contributions are non-concessional contributions and will count towards your non-concessional contributions cap unless you’ve claimed a tax deduction for them.

If you claim a tax deduction for personal super contributions, they become part of your concessional contributions. Spouse contributions aren’t eligible for a tax deduction, but your spouse may be eligible for a spouse contribution tax offset of up to $540 if their income is $37,000 or less.

You may be able to claim a tax deduction on any personal super contributions you make until you turn 75.

If you’re aged between 67 and 75, you’ll need to meet the work test to be eligible to contribute to super and claim the deduction.

From 1 July 2019, a work test exemption may apply if you have a total superannuation balance of less than $300,000 and you met the work test in the previous financial year.

To claim a tax deduction for personal contributions, you’ll need to complete and lodge a valid notice of intent with your super fund. This valid notice needs to be acknowledged (in writing) by your fund before you can claim the deduction in your tax return.

You can check if you’re eligible to claim a deduction for personal super contributions on the ATO website.

Keep in mind if you claim a deduction for your contributions, you won’t be eligible for a super co-contribution.

Adding to super if you’re not working

If you’re under 67, you can make personal after-tax contributions to your super fund, even if you’re not working.

If you’re 67 or over, you can only make personal after-tax super contributions if you:

  • Aren’t yet 75 or older; and
  • Have met the work test, i.e. been employed for at least 40 hours over 30 consecutive days during the financial year

Otherwise, you may be eligible for the work test exemption if you are a recent retiree and have not used the work test in previous financial years. 

To be eligible for the work test exemption, your total super balance must be less than $300,000 at the beginning of the financial year following the year that you last met the work test. In addition, if you are 65 years or older, you may be eligible to make a downsizer contribution.

What’s the tax concession?

Claiming your personal super contributions as a tax deduction, or making a downsizer contribution, may reduce your taxable income. This can reduce the total amount of tax you pay.

4. Spouse contributions

The ATO defines a spouse as another person (of any sex) who:

  • You’re in a relationship with, registered under a state or territory law; or
  • Although not legally married to you, lives with you on a genuine domestic basis in a relationship as a couple

What’s the tax concession?

Suppose you’re in a relationship and have made contributions under the threshold to your spouse’s super fund or retirement savings account (RSA) during the financial year. In that case, you may be entitled to a spouse contribution tax offset if your spouse was under 75 when the contribution was made.

The maximum spouse contribution tax offset is $540.

5. Super contribution splitting

Some super funds let you transfer some of your before-tax contributions, usually from the previous financial year, to your partner’s super account.

Examples of before-tax contributions include employer contributions and personal contributions where you’ve claimed a tax deduction. These are also known as concessional contributions.

How does it work?

You can transfer concessional contributions you already made in the previous financial year (which counted toward your contributions cap) to your spouse’s superannuation account. The maximum you can send to your spouse’s account is the lesser of:

  • 85% of your concessional contributions for the financial year; or
  • The concessional contributions cap for that financial year

What’s the tax concession?

This can be a way to top-up your partner’s super, so they don’t fall behind.

The amount you send to your spouse’s super account won’t count towards their cap. This is because it was already counted against your cap when you made the original contribution.

By splitting super contributions between you and your spouse, you may be able to provide superannuation and pay for insurance premiums for your non-working or low-income spouse.

Also, you may be able to manage your transfer account balance to be within the $1.6 million2 cap when you retire.

Do I need to lodge a tax return?

If you earn less than the tax-free threshold, generally, you won’t pay income tax to the ATO. You neither lodge a tax return, but some fine details are explained below in examples 1 and 2. 

Sometimes you may need to lodge a tax return in order to get back some tax money you paid. However, even if you don’t lodge a tax return, you must send the ATO a “non-lodgement advice”. We can help you with that.

If you earn more than the tax-free threshold, you definitely need to lodge a tax return. Your income tax is calculated on how much money you made above the tax-free threshold. 

The amount of tax you pay is not calculated by a simple percentage – it is a more complex mathematical formula set out by the ATO, but it works in a fairly simple way.

Tax-free threshold – Examples

Let’s break down the tax-free threshold with some examples. These three common cases help show whether or not you need to lodge a tax return. 

Plus, for people who don’t need to lodge a return, the ATO still has a requirement that you lodge a “Non-Lodgement Advice“, and we’ll cover that down below. (You can get that done for you, whereas many tax agents charge fees for non-lodgement.)

Example 1

You earned more than $18,200

You must lodge a tax return.

If during the past financial year your taxable income was more than $18,200, you are required to lodge a tax return.

Fit into this category and ready to start now?

Example 2

You earned less than $18,200, but paid tax on your income

You must lodge a tax return to get back the taxes you paid.

Even though you earned under the new tax-free threshold, you should lodge a tax return as you paid tax on your income during the year.

In this situation, you may likely get all of the tax you paid throughout the year back after you lodge your tax return.

Want that money in your account as soon as possible?

Example 3

You earned less than $18,200 and paid no tax on your income

You might not need to lodge a tax return.

Good news! If you earned less than $18,200 AND you didn’t pay any tax on this income, then you may not be required to lodge a tax return this year.

If you fall into example 3, you won’t need to lodge a return in most cases.

However, you may still need to lodge a tax return if you:

  • are entitled to the private health insurance rebate
  • had a reportable fringe benefits amount on your PAYG Summary
  • had a reportable employer superannuation contribution on your PAYG Summary
  • made a loss or can claim a loss made in a previous year
  • were an Australian resident for tax purposes, and you had exempt foreign employment income plus $1 or more of other income

Does example 3 apply to you?

If you don’t need to lodge a tax return, this Non-Lodgement would still lodge a ‘Non-Lodgement Advice‘.

What is a Non-Lodgement Advice?

Don’t need to lodge a tax return this year? That does not mean you can just forget about it – you can’t ignore the ATO. You need to submit a piece of non-lodgement advice instead.  

This document explains to the ATO that you do not need to lodge this year and ensures they don’t list you as having an outstanding return that still needs to be lodged.

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