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Understanding the tax-free threshold: a guide for Australian residents and newcomers

20/04/2023 by
The Marketing Team
The tax-free threshold is a key feature of Australia’s tax system. It allows residents to earn up to $18,200 each year without paying income tax. By claiming it correctly, you reduce the tax withheld from your pay and improve your cash flow. This guide will help you understand how the tax-free threshold works and how […]
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The tax-free threshold is a key feature of Australia’s tax system. It allows residents to earn up to $18,200 each year without paying income tax. By claiming it correctly, you reduce the tax withheld from your pay and improve your cash flow. This guide will help you understand how the tax-free threshold works and how to manage it.

A quick guide to tax-free threshold

The tax-free threshold allows Australian residents to reduce their tax obligations. To benefit from the threshold, claim it with your primary employer—the one paying you the most. Avoid claiming it with multiple employers to prevent under-withholding and unexpected tax debts. If you are a non-resident or have secondary jobs, the tax-free threshold does not apply. For secondary jobs, your employer withholds tax at a higher rate to cover your total income. By understanding these rules, you can manage your tax obligations effectively and avoid surprises at tax time.

Simplifying tax for Australian residents

Australians can use the tax-free threshold to lower their tax obligations. By applying this threshold, up to $18,200 of income is exempt from tax, resulting in higher take-home pay. It reduces the amount your employer withholds throughout the year, making it easier to manage everyday expenses.

The tax-free threshold can make a big difference to your finances. It reduces the amount of tax you pay and helps you manage your money better. If you claim it with your main employer, you’re less likely to owe a tax bill at the end of the financial year. Understanding how it works ensures you don’t pay extra tax or face unexpected costs.

This guide explains everything you need to know about the tax-free threshold. It covers:

  • Who can claim the tax-free threshold
  • How to claim it when you start a job
  • What happens if you have a second job or change jobs
  • Adjustments for part-year residents and other unique situations

Managing your taxes doesn’t have to be stressful. By understanding the tax-free threshold, you can make better financial decisions and avoid overpaying taxes. Whether you’re starting work, switching jobs or managing multiple income sources, this guide will help you make the right choices.

Read on to find out about the tax-free threshold, how it affects your income and what you need to do to stay on top of your tax obligations.

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What is the tax-free threshold, and why is it important?

The tax-free threshold is a rule in Australia’s tax system. This threshold is the amount of income you can earn before any tax is taken out.

If you claim the full tax-free threshold, you pay less tax on your wages. Employers use this rule to determine how much tax to withhold from your income during the year. This can reduce the amount of tax you pay upfront and help you manage your finances better.

How the tax-free threshold is calculated

Here’s a simple breakdown:

Time Period Tax-Free Amount
Weekly $350
Fortnightly $700
Monthly $1,517

This breakdown shows how the threshold applies to regular pay periods. By claiming it, you’ll have more take-home pay in your salary or wage.

Why claiming the tax-free threshold matters

Claiming the tax-free threshold has several benefits:

  • Reduces tax withheld: Less tax is taken from your pay, so you have more money available during the income year.
  • Improves cash flow: Managing your living expenses becomes easier with higher take-home pay.
  • Avoids overpaying tax: If you don’t claim, you may pay more tax than necessary throughout the year.

Understanding and claiming the tax-free threshold ensures your tax deductions are accurate. It also helps you avoid tax issues at the end of the financial year.

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Who can claim the tax-free threshold?

The tax-free threshold is available to most Australian residents. It helps reduce the amount of tax you pay by allowing you to earn up to $18,200 tax-free. However, eligibility depends on your residency status and income circumstances.

Eligibility criteria

You can claim the tax-free threshold if you are an Australian resident for tax purposes. This includes individuals who meet specific residency tests the Australian Taxation Office (ATO) set. Australian residents can benefit from reduced tax withholding throughout the financial year.

Non-residents cannot claim the tax-free threshold. They must pay tax on every dollar they earn in Australia, regardless of the amount. Non-residents are taxed at higher rates, making accurate residency classification essential.

Special considerations for part-year residents

Your tax-free threshold will be adjusted if you become an Australian resident part-way through the financial year. The threshold is calculated based on the months you spent in Australia.

For example:

Months in Australia Adjusted Tax-Free Threshold
6 months $9,100
9 months $13,650

This ensures fairness based on the time you spent in Australia during the income year.

Employers’ role

Employers use your Tax File Number (TFN) declaration to determine if you’re claiming the tax-free threshold. They adjust the tax withheld from your wages accordingly. If you do not provide accurate information, your employer may withhold too much tax, leading to overpayment.

Understanding your eligibility and providing correct details ensures you reduce the amount of tax withheld and manage your finances effectively.

How to claim the tax-free threshold when starting a job

When you start a job, claiming the tax-free threshold ensures your employer withholds the correct amount of tax from your pay. Follow these steps to claim it correctly.

Claiming through the TFN declaration form

The Tax File Number declaration form is the key to claiming the tax-free threshold. Your employer will provide this form when you start a new job.

Steps to claim:

  1. Provide your TFN: This ensures your employer can link your earnings to your tax records with the Australian Taxation Office.
  2. Choose to claim the tax-free threshold: Tick the box to claim it with this employer.
  3. Select your primary employer: Claim the tax-free threshold only with the employer who pays you the most.

Why you should only claim with one employer

If you have more than one job, you must claim the tax-free threshold with only one employer. Usually, this is your primary payer—the employer who provides most of your income.

Claiming the threshold with more than one employer can lead to under-withholding of tax. This means you may receive a tax bill when you lodge your tax return.

What happens if you change jobs or take a break?

If you change jobs during the financial year, fill out a new TFN declaration form with your new employer. Indicate whether you are claiming the tax-free threshold again.

If you take a break from work, you don’t need to notify the ATO. However, make sure to provide updated information when you return to work or start earning income again.

By claiming the tax-free threshold correctly, you reduce the amount of tax withheld and avoid surprises at tax time.

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Managing the tax-free threshold with multiple jobs

Having more than one job can complicate your tax situation. It’s important to manage the tax-free threshold correctly to avoid issues at tax time.

Claim the tax-free threshold only with your main job

You should claim the tax-free threshold with your main job. This is usually the job where you earn the most income. By doing this, your primary employer will withhold less tax from your pay, ensuring you benefit from the $18,200 allowance.

For any secondary jobs, do not claim the tax-free threshold. Your secondary employer will withhold tax at a higher rate. This helps prevent you from owing tax when you lodge your tax return.

How secondary jobs are taxed

Your secondary employer assumes all income from your jobs will combine and push you into a higher tax bracket. They withhold tax accordingly. While this may seem like you’re paying more tax upfront, it balances out when your total income is assessed at the end of the financial year.

Example of incorrect claims

Sarah works two jobs. She claims the tax-free threshold with both employers. Each employer withholds less tax, assuming Sarah earns only $18,200 annually. However, Sarah’s combined income totals $60,000. At tax time, Sarah is taxed at a higher income level. Sarah may receive a tax bill since her employers didn’t withhold enough tax during the year.

Key takeaway

Always claim the tax-free threshold with your primary job only. For other jobs, let your employer withhold at a higher rate. This reduces the risk of a tax debt and ensures you pay taxes correctly throughout the year.

Part-year or part-way adjustments to the tax-free threshold

The tax-free threshold is adjusted if you are a resident for only part of the financial year or if you start work part-way through the year. These adjustments ensure fairness by reflecting the period you were in Australia or when you were earning income.

How the tax-free threshold calculated for part-year residency

The tax-free threshold is not fixed for part-year residents or those starting work later in the year. Instead, it is calculated proportionally based on the number of months you qualify. Use this formula:

Adjusted Tax-Free Threshold = $13,464 + ($4,736 ÷ 12 × Number of Eligible Months)

This formula ensures you only claim the threshold for the time you were eligible during the income year.

Example calculation

Anna became an Australian resident in October and remained a resident for the rest of the income year. Since she qualifies for nine months, her adjusted tax-free threshold would be:

$13,464 + ($4,736 ÷ 12 × 9) = $17,023

Anna can earn $17,023 tax-free. Any income beyond this amount is taxed based on the applicable tax rates.

Starting work part-way through the year

If you start work mid-year, the same calculation applies. For example, if you started in January, your threshold would cover six months:

$13,464 + ($4,736 ÷ 12 × 6) = $15,832

Practical tips

  • Let your employer know if you qualify for an adjusted threshold by completing your Tax File Number declaration.
  • Ensure you calculate the correct threshold for the months you were in Australia or earning income.

Understanding these adjustments ensures the correct tax is withheld and avoids surprises at tax time.

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

If you don’t claim the tax-free threshold, your employer will withhold more tax from your income. This ensures you don’t underpay tax, but it can reduce your take-home pay unnecessarily if you are eligible to claim.

Consequences of not claiming the tax-free threshold

Failing to claim the tax-free threshold means:

  • Higher tax withheld: Your employer will withhold tax from your income as if you are not entitled to the $18,200 tax-free allowance.
  • Smaller cash flow during the year: Withholding extra tax means less money in your pocket for daily expenses.
  • Larger refund or smaller tax bill: At the end of the financial year, when you lodge your tax return, the ATO will reconcile the tax you paid throughout the year. You may receive a tax refund if too much tax was withheld.

When not to claim the tax-free threshold

There are cases where you should not claim the tax-free threshold:

  1. Secondary jobs: If you have a second job, you should not claim the tax-free threshold with your secondary employer. The tax-free threshold can only apply to one job. Your employer will withhold tax at a higher rate for other jobs to account for your total income.
  2. Non-residents for tax purposes: If you are a non-resident, you are not eligible for the tax-free threshold. All income you earn in Australia is taxed from the first dollar.

Understanding when to claim and when to avoid claiming ensures your tax is managed correctly. If you don’t claim in the right situations, you may lose out on higher take-home pay or face incorrect tax withholding. Always review your eligibility to get it right.

Avoiding common mistakes with the tax-free threshold

Managing the tax-free threshold correctly can help you avoid tax issues. However, common mistakes can lead to problems such as overpayment, underpayment, or tax bills. You can stay on top of your tax obligations by understanding these errors and their solutions.

Common mistakes

  1. Claiming with multiple employers

    • Some people mistakenly claim the tax-free threshold with more than one employer. This leads to under-withholding, as both employers assume you are entitled to the full tax-free allowance.
    • At the end of the financial year, the ATO will assess your combined income. If too little tax was withheld, you may receive a tax bill.
  2. Forgetting to update the ATO after employment changes

    • Changes in your job, income sources, or residency status can affect your eligibility for the tax-free threshold.
    • Failing to inform the ATO or update your Tax File Number declaration can lead to incorrect tax withholding.

Solutions

  • Correct TFN declaration errors

    • If you realise you’ve claimed the threshold with more than one employer, notify your secondary employer. Update your TFN declaration to stop claiming the tax-free threshold with that job.
  • Contact the ATO to resolve issues

    • If too much tax was withheld or you face a tax bill, the ATO can help. You can correct errors during tax time or through your employer.

Avoiding these mistakes helps reduce the amount of tax withheld unnecessarily and ensures your taxes are appropriately managed. Always review your eligibility when your income or job situation changes.

Frequently Asked Questions about tax-free threshold

What is included in a tax return?

A tax return details your taxable income, deductions, and any offsets you can claim. It shows the tax payable or any refund you may receive back at the end of the financial year. The tax return also accounts for the Medicare levy and other levies that may apply.

How do tax rates apply to my income?

Income tax rates apply to your taxable income after deducting the tax-free threshold. If you don’t claim the threshold, you pay tax on the first dollar you earn. Rates vary based on how much you earn in the income year and may include the Medicare levy.

What does the ATO withhold from my income?

The ATO ensures employers withhold tax based on PAYG (Pay As You Go) rules. If you claim the tax-free threshold, less tax is withheld. This reduces your tax liability but may still leave some tax payable depending on your income sources.

Do I pay more tax on a second job?

Yes, a second job is taxed at a higher rate. Your secondary payer withholds more tax to cover the combined income for the income year. This helps avoid a tax liability when you lodge your tax return at the end of the financial year.

What if I change jobs during the income year?

If you change jobs during the income year, complete a new TFN declaration with your new employer. Indicate if you want to claim the tax-free threshold again or leave it unclaimed for that payer. This prevents incorrect withholding.

How does the income year work in Australia?

The income year runs from 1 July to 30 June the following year. At the end of the income year, you must lodge a tax return showing your taxable income for the income year and the tax you paid throughout the year.

Can multiple income sources affect my tax?

Yes, having one or more payers or income sources can affect your tax. Only one employer can apply the tax-free threshold. Other employers withhold tax at higher rates, which may leave less take-home pay but helps avoid tax payable later.

How does the tax-free threshold for newcomers work?

The tax-free threshold for newcomers applies to people who become Australian residents during the financial year. The threshold is apportioned based on the months you are eligible. This ensures fairness and aligns with the Australian Government’s tax rules.

Is the Medicare levy included in my tax?

Yes, the Medicare levy is part of your tax payable. It is 2% of your taxable income for the income year and funds Australia’s healthcare system. The levy may be reduced or exempt for low-income earners or certain situations.

Mastering the tax-free threshold

The tax-free threshold helps reduce how much tax you pay during the year. Claim it with your main employer to ensure accurate tax withholding. Avoid claiming it with multiple employers to prevent tax issues.

Know if you are eligible to claim and how to manage it when you have more than one job or start working part-way through the year. Update your details when your circumstances change to avoid mistakes.

Use Business Kitz to simplify your tax management. Our tools and resources help you stay compliant and organised, making tax time easier and stress-free.

About
The Marketing Team
Business Kitz Marketing team are experts in their field. You can expect the best business guides and updates on employment law here.
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