If you’re earning an income in Australia, the tax-free threshold will have a big impact on your take home pay at the end of the year. Get to know the basics, in this helpful guide from Oiyo.
What is the tax-free threshold?
Australia has a progressive tax system, this means that the more you earn – the more tax you’re required to pay. 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. MoneySmart defines the tax-free threshold as:
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.
In a year, the $18,200 tax-free threshold works out to be:
- $350 a week
- $700 a fortnight
- $1,517 a month
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.
What if you have more than one source of income?
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. 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
Should you claim it?
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.
As a result, virtually everyone has something to gain from the tax-free threshold, regardless of their income size.
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. Since everyone’s situation is so different, it’s always a good idea 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.
Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.