Did you know that in Australia, you can earn up to $18,200 without paying a single cent in income tax?
The tax-free threshold is a crucial aspect of Australia’s taxation system that many residents overlook.
This financial provision offers significant relief to workers, particularly those in lower income brackets.
Understanding how it works can help you make more informed decisions about your personal finances and tax obligations.
What exactly is the tax-free threshold?
The tax-free threshold is the amount of income an Australian resident can earn before being required to pay income tax. For most Australian residents, this means the first $18,200 of annual income is completely tax-free.
Key Breakdown of the Tax-Free Threshold
| Income Period | Tax-Free Amount |
|---|---|
| Weekly | $350 |
| Fortnightly | $700 |
| Monthly | $1,517 |
How to claim the tax-free threshold?
Claiming the tax-free threshold is a straightforward process that begins with completing a Tax File Number (TFN) Declaration Form when you start a new job. On this form, you need to answer ‘Yes’ to the question about claiming the tax-free threshold.
Here’s how it works:
- If you earn less than $18,200 in total during the year, you will not pay any tax.
- If your income exceeds $18,200, tax will only be withheld on the amount above this threshold, depending on your income tax bracket.
If you have more than one job, you can only claim the tax-free threshold from one employer. Typically, this should be the employer who pays you the highest salary.
The tax-free threshold for part-year residents
If you are an Australian resident for only part of the year, your tax-free threshold is calculated proportionately. This is done using two components:
- A fixed amount of $13,464.
- An additional amount of up to $4,736, prorated based on the number of months you were a resident during the year, including the month of your arrival.
For instance, if you became a resident in October, your tax-free threshold would be adjusted to reflect the nine months you were in Australia.
Non-residents, however, are not eligible to claim the tax-free threshold and must pay tax on every dollar of income earned in Australia.
Multiple jobs and the tax-free threshold
Managing the tax-free threshold becomes more complex if you have multiple sources of income. While you can claim the tax-free threshold from one employer, any additional income sources will have tax withheld at a higher rate.
Failing to manage this correctly can result in an unexpected tax debt at the end of the financial year. To avoid this, ensure that:
- You claim the tax-free threshold from the employer who pays you the highest income.
- Your other employers deduct tax at the no tax-free threshold rate.
By doing this, you can minimise the risk of a tax shortfall when filing yo
Key considerations
1. Why might i owe tax at the end of the year?
If you claimed the tax-free threshold from multiple employers, it’s possible that not enough tax was withheld during the year. Since Australia’s tax system is progressive, your total income from all sources determines the tax rate applied.
2. Adjusting tax withheld
If you anticipate earning more than $18,200 across multiple jobs, you can request one of your employers to withhold additional tax. This ensures that your overall tax liability is covered.
3. Do I need to lodge a tax return if i earn less than $18,200?
- If you earned less than $18,200 and no tax was withheld, you might not need to lodge a return. However, you’ll need to submit a Non-Lodgement Advice to inform the Australian Taxation Office (ATO).
- If tax was withheld from your income, you must lodge a return to claim a refund of the tax paid.
What is a non-lodgement advice?
Non-Lodgement Advice (NLA) is a certain way of informing the ATO that one does not require lodgment of tax returns in a specific year. It is very important, as a result, that the ATO will not mark your account overdue. Of course, there are still conditions when you will have to lodge a tax return:
- Earn interest from a bank account.
- Imply entitlement to private health insurance rebate.
- Have reportable fringe benefits or employer contributions to superannuation.
Benefits Of understanding the tax-free threshold
Knowing how taxation-free thresholds operate would allow you to:
- Take home more pay because you have reduced tax deducted unnecessarily.
- Prepare for avoidable tax bills because income earned from more than one source is not taxed correctly.
- Stay within the ATO requirements by lodging your return and/or submitting a Non-Lodgement Advice.
Keeping track of your understanding of what the tax free threshold eligibility criteria are in regard to responsibilities and entitlements are certainly important components of efficient finances management.
Make the most Of the tax-free threshold
Understanding the tax-free threshold is crucial for managing your finances effectively. If you’re still unsure about how it applies to your situation, the personal accountants at KPG Taxation can help you. Whether you need assistance in claiming the threshold or lodging your tax return, we take care of you at KPG Taxation so you won’t have to waste time and effort. Feel free to talk to us for personalized advice!
