If you are submitting your tax return for the first time this year, the first thing you should do is determine the amount of the income that is exempt from taxation. Tax-Free threshold refers to the annual income of an individual that doesn’t require them to pay taxes on it.
In simpler terms, the tax-free threshold is the point till which the earned amount is not liable to be taxed at all. Isn’t that great? Sadly, not a lot of people realise the importance of this threshold and its impact.
To help you know about the tax-free threshold and use it for your benefit, we have gathered all the essential information you may need.
What is the tax-free threshold?
The tax-free threshold is the amount you can make in one fiscal year before being subject to income tax. As per the Australian Taxation Office (ATO), this threshold is currently $18,200.
So an Australian resident (for tax purposes) will not have to pay tax on the first $18,200 of the annual income of a fiscal year. Once the income exceeds this threshold, you will have to start paying taxes on the income.
Claiming the taxable income exemption amount
A lot of people have this perception that claiming the taxable income exemption amount would be too difficult. However, this is not the case. Here’s what you need to do.
Do you have a TFN (Tax File Number)?
You can minimise the income tax amount you need to pay if you have a TFN and are a resident of Australia. It can be done in two steps.
Firstly, fill out a Tax File Number Declaration form once you start working for a new employer. You can get this form by applying for a new Centrelink payment.
After that, let the employer know that you want to claim the tax-free threshold by answering “Yes” to “Do you want to claim the tax-free threshold from this payer?”
Once this is done, you have 28 days to submit the Tax File Number Declaration with your TFN to your payer to claim an exemption.
What if I have more than one job? Can I still claim the tax-free threshold?
Having more than one job is extremely common and which is why a lot of people get worried about whether they can claim the tax-free threshold or not.
In the majority of cases, you can’t claim the tax-free threshold for all the jobs you have. You can claim it on only one job at a time. The ATO states that people having two or more sources of income in one financial year should claim the tax-free threshold from the one that pays the highest salary or wage.
This rule is applicable to anybody who has multiple sources of income in one year. You should claim the tax-free threshold only if you are absolutely sure that the total income from all the payers will not exceed $18,200.
Otherwise, you have to fill out a withholding declaration form. You must provide it to one of the employers to let them know that you are no longer claiming the tax-free threshold. As a result, one does not have to pay taxes on the excess amount of income.
Those who fail to do this fall under the risk of being undertaxed and will need to make up for the difference by paying more tax at the end of the fiscal year.
Suppose you received the tax-free threshold from one employer alone. Your other income stream and any additional income over and beyond that will be taxed at the rate applicable to those who don’t receive the tax-free threshold, which is generally higher.
The ATO has stated that such instances could result in the taxpayer being overtaxed during the year, but any funds withheld in excess of what was required will mostly likely be refunded to you in the form of a tax refund at the end of the year after completing and submitting your tax return.
What if you do not claim the tax-free threshold?
If you don’t make any claims against the tax-free threshold for a fiscal year, you put yourself at risk of being required to pay income tax on the total earned money.
As Australia’s income tax brackets assume that you claim the tax-free threshold and avoid paying tax on the free threshold, you will be paying more than the needed tax in the year. Although the ATO would refund the overpaid tax (as stated before), you will still be making additional tax payments throughout the year.
The ATO allows a person to reduce the amount of tax deducted from their salary in the future. They can submit the PAYG withholding variation application form to do the same.
Income from more than one employer
An individual getting paid by two or more different payers at the same time if one of the following applies to them:
- They hold down at least two jobs;
- They have regular part-time employment and also receive an allowance or taxable retirement income from the government.
- They are working under an ABN as a sole trader, a contractor or another business structure.
We have already discussed claiming the threshold from only one employer is allowed while the others will withhold tax.
Keep in mind that the total amount of taxes deducted from the combined income will either be less or more than the complete amount you have to pay to satisfy the tax bill at the end of the year.
After filing the income tax return, you will be paid back the funds withheld for taxes. What if not enough tax was deducted from the paycheck? In that case, you will have to pay it to the ATO. In both cases, the ATO ensures that an appropriate tax has been paid as per your income.
To avoid this, you have the option to submit a request for the modification of the tax amounts that are withheld from the income. As a result, it will match the tax liability you have at the end of the year. You could do it for any of the three cases:
Annual Salary < $18,200
Having two or more jobs does not necessarily mean that a person’s income will go above the tax-free threshold. Claiming the tax-free threshold on one job will lead to some amount being withheld as tax from the other one. Lodging the income tax return for the next year will help you receive the tax refund.
Now, if you are sure that you are going to earn the same amount in the next financial year, you can choose to claim the Tax-free threshold for the second job too through the employer, so no tax is withheld from your income.
For this, you will need to complete the withholding declaration and provide it to your employer.
Annual Salary > $18,200 & a huge amount of tax has been deducted from it
Let us assume that your total income is over $ 18,200, and an excessive amount has been withheld from it. You can apply to reduce this amount. It can be done by completing and lodging a PAYG withholding variation application with the ATO.
The ATO will calculate the variation amount after receiving your application, and you will get new instructions for withholding the tax as a payer.
Remember to only apply for this variation if you are sure about your income amounts and you believe that you are being disadvantaged by the withholding rates applied.
An insufficient amount of tax is withheld.
Since we have discussed the situation where too much tax is withheld, what about the situations where too little tax is withheld? There might be some times when the employer deducts a not-so-sufficient amount of tax from your payments to fulfil the tax liabilities for the current taxable year.
So for those times, you can request one or more payers to withhold more amount from your payments to avoid having any tax liability.
The request you make must be in writing; however, you can choose to present in any format (as per the ATO). You may submit your request via an online form, an e-mail or a paper form.
An Australian resident for a part of the year
If an individual stops being or becomes an Australian resident for tax purposes during the income year, they receive a part-year tax-free threshold. This threshold is always lower than the full year’s threshold that most resident taxpayers follow.
There are two components of the part-year tax-free threshold as per the ATO:
- A flat amount of $13,464
- Additional $4,736 (The ATO works on the number of months a person was in Australia during that income year, including the month of arrival)
For those who aren’t a resident throughout the entire year, this tax-free threshold is not applicable. What this means is that they have to pay tax on each dollar of income they earn in this country.
Let us understand this with an example. Suppose a person became a resident in the remaining 3 months of the income year. The flat amount of $13,464 is tax-free, i.e., no tax is payable on it. For the additional amount, $4,736 is multiplied by 3 (the number of months as an Australian resident) and the resultant amount is then divided by 12.
The additional amount, in this case, is $1,184. Adding this amount to the flat amount, we get $14,648, which is the amount that does not require any tax payments from the new resident.
From the following income year, you will use the general tax-free threshold that all resident taxpayers use in Australia.
The tax-free threshold for newcomers
Are you a newcomer to Australia? If yes, then knowing about this tax-free threshold can be extremely beneficial to you.
If you are a resident of the country for tax purposes for the whole year, you get to enjoy the same tax-free threshold as other residents, i.e., no tax payable for the first $18,200 of your income.
Adjusted tax-free threshold
For the ones that entered the country with the intention of residing during the income year, the tax-free threshold is adjusted accordingly. It is the same as the tax-free threshold for Australian residents for part of the income year.
Keep in mind that the Australian income year starts on 1 July and ends on 30 June. You will have to calculate the months you stayed in the country during the income year (not the calendar year).
Tax-free threshold and PAYG Tax
The yearly tax-free threshold figure is really helpful when you are doing your annual tax return, but in the case of figuring out whether you have to make pay-as-you-go PAYG tax instalment payments on your income, it might not be of great help.
Instead, the corresponding tax-free cutoffs applicable to normal earnings may help more. Here’s how the ATO defines them:
- People who are paid weekly will pay tax on earnings that exceed $350.
- People who are paid fortnightly will pay tax on earnings exceeding $700.
- For those getting paid monthly, income above $1,517 is tax payable.
You can also use an income tax calculator to get a more precise idea of the tax you need to pay on your annual income.
It is worth noting that employers are not responsible for applying the tax-free threshold to the earnings of the employees. Instead, it is something the employee has to actively claim when starting a new job or applying for a Centrelink payment. Otherwise, the ATO states that the PAYG tax will be calculated from the first dollar of the earnings, irrespective of how much you earn, be it less or more.
What does the term ‘Taxable Income’ mean?
The taxable income of an individual stands for the money left after all the expenses or costs associated with earning the income are subtracted.
To calculate the amount that is subject to taxation, you have to add all the qualified claims made by you first. After this, deduct this amount from the income you generated in the fiscal ear. The amount you get after this calculation is subject to taxation and is your taxable income.
Deductions are highly encouraged as they can help you reduce the amount of income tax a person owes significantly.
Do I have to pay income tax?
If you are working under an employer, a portion of your pay or wages will be withheld regularly to cover your tax obligations. The employer is required to make direct payments of the employees’ taxes to the ATO at the beginning of each pay period.
In case the money you receive is from other sources, you have to keep your own financial records and report that income since nobody else is responsible for doing it on your behalf. This applies to the money received from shares, bank interest and property.
You need to submit the income tax return on an annual basis. A tax agent can assess your income along with the taxes that have already been withheld from your salary by your employer. Still, the responsibility of disclosing the additional income sources to your tax agent falls on your shoulders.
When the employer pays a sufficient amount of tax on an employee’s behalf, the employee may become eligible to get a tax return once the necessary deductions are made.
Do I still qualify for the tax-free threshold if I find new employment in the current fiscal year?
You can switch the employer from whom the tax-free threshold is claimed on your tax return without any problems. There will not be any problem as long as you ensure that you are claiming the threshold from one employee at a time.
After finding a new employer, you will have to stop claiming the threshold from the employer you aren’t working for anymore. There is no restriction on claiming it from the new employer.
There is no need to specifically notify your employer that you will not be claiming the threshold with them once you stop working. On the other hand, the employer will stop granting any tax-free amount to you as soon as they stop paying you.
Does having two jobs subject me to pay more taxes?
It does not matter if you earn your money through one job or multiple jobs. The amount of tax you are required to pay on your income is not affected by the number of jobs. Instead, it depends upon the total income.
Although some people do feel like they are paying more in taxes after having two jobs, there is no such thing. After filing the income tax return, all of your income is totalled together. Then the tax burden is calculated as a lump sum as per the combined income. The tax-free threshold may be the cause of this confusion for some people.
Overall, the truth is that no income tax is payable on the first $18,200 of the annual earnings of Australian residents. The income above that is what you have to pay tax on whether it comes from one job or multiple.
Disclaimer: The information on this website is for general purposes only and should not be relied upon for making legal or other decisions. The advice provided in this article is general in nature and is not subject to the personal financial situation and needs of any individual. Clear Tax tries to keep the information accurate and up-to-date; however, you should bear in mind with changing circumstances, the accuracy and reliability of the information will not necessarily remain the same. The information is by no means a substitute for financial advice.