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Tax-Free Threshold Explained

What if there was a way to keep more of your earnings—without doing anything extra? Sounds too good to be true, right?

Well, for most Australians, there’s actually a way to legally avoid paying tax on part of their income. It’s called the tax-free threshold, and getting it right could make a significant difference in your wallet.

Tax-Free Threshold- Australia

In this post, we’ll explore why this little-known benefit is so important and how it can work for you.

What Is the Tax-Free Threshold?

The tax-free threshold is the amount of income you can earn before you start paying tax. In Australia, this threshold is currently set at $18,200 per financial year. This means that if you earn $18,200 or less, you won’t pay a single dollar in income tax.

Think of it this way: it’s like the first $18,200 of your earnings is completely invisible to the tax office. No deductions, no tax rates—just yours to keep.

How Much Can You Earn Before Paying Tax?

Breaking it down, the tax-free threshold is equivalent to:

  • $350 per week
  • $700 per fortnight
  • $1,517 per month

If you earn less than these amounts, you should not be paying any tax. But if your employer is withholding tax from your pay even when you earn under the threshold, you might be due for a refund.

How to Claim the Tax-Free Threshold

When you start a new job, your employer will ask you to complete a Tax File Number (TFN) Declaration Form. This form includes a simple question:

“Do you want to claim the tax-free threshold from this payer?”

If you have only one employer, the answer should be yes. This ensures that you aren’t having unnecessary tax deducted from your pay.

However, if you have multiple jobs, it’s a little trickier.

What If You Have More Than One Job?

If you have more than one employer at the same time, you can only claim the tax-free threshold from one. Normally, you should claim it from the employer who pays you the most.

If You Have More Than One Job

Why? Because if you claim the tax-free threshold from multiple employers, not enough tax might be withheld from your total earnings. This could leave you with a surprise tax bill at the end of the financial year.

What Happens If You Don’t Claim the Tax-Free Threshold?

If you choose not to claim the tax-free threshold, your employer will withhold tax from your very first dollar earned—even if you’re under $18,200 per year. This means you might end up paying more tax than necessary. The good news? You’ll likely get a refund when you lodge your tax return.

What If You Change Jobs?

If you switch jobs during the financial year, you can claim the tax-free threshold from your new employer. Your old employer will stop paying you, so it’s safe to claim it again. Just remember to fill out the TFN Declaration Form with your new employer.

What If You’re a Part-Year Resident?

If you’ve only been an Australian tax resident for part of the year, your tax-free threshold will be prorated based on how long you were a resident. This consists of:

  • A base amount of $13,464, plus
  • An additional $4,736, calculated proportionally based on the number of months you were a resident.

If you’re a non-resident for tax purposes, you don’t get a tax-free threshold at all—you’ll be taxed from the first dollar you earn.

What If Too Much or Too Little Tax Withheld?

If too much tax has been withheld, you’ll likely receive a tax refund when you lodge your return. But if too little was withheld, you might be hit with a tax bill.

tax-free threshold

If you want to adjust your tax withholding amount, you can complete a PAYG withholding variation application to ensure you’re paying the right amount.

Conclusion

At the end of the day, the tax-free threshold is one of the easiest ways to ensure you’re not overpaying tax unnecessarily. If you haven’t claimed it, or if you’re unsure whether you’ve set it up correctly, now’s the time to check. A little bit of attention now could mean hundreds—or even thousands—of extra dollars in your pocket over the year. And who wouldn’t want that?

So, are you claiming the tax-free threshold correctly, or are you leaving money on the table? Now that you know the ins and outs make sure you’re making the most of your earnings!

 

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