What is the Tax-Free Threshold in Australia?

By Kaleem Ulah

February 15, 2024

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The tax-free threshold is one component of taxation that Australians need to have a solid understanding of. You are liable to pay tax on your income in Australia if you are a resident of Australia, have an income, and have a tax filing number (TFN). The tax-free threshold is a significant component that plays a role in deciding the amount of tax you must pay, if any. The tax-free threshold value is the annual income you can generate without being subject to income tax. This barrier has been established at $18,200 for the fiscal year 2023-2024 in Australia. Consequently, you will not be required to pay income tax if your annual earnings are less than this amount. You will, however, be subject to taxation on the amount that exceeds this limit if your income is higher than the limit. This blog will teach you more about the Australian tax-free threshold and how to claim it.

What is taxable income?

Taxable income is the amount of money that remains once you have deducted all of the expenses you incurred to earn your income. To determine the amount of income that will be subject to taxation, you will first need to tally up all of your eligible claims and then subtract that total from the income you generated during the fiscal year. This will result in your taxable income and the tax you must pay. You can significantly lower your income tax by claiming all available deductions. The 2924 tax bracket can be represented in the table below.

Who is required to file a tax return?

A tax return is required to be filed by every citizen that makes a certain amount. This includes the following:

  • Residents of Australia whose annual income is more than $18,200.
  • Any taxpayer who is a resident and has a yearly income of less than $18,200 and who has had tax taken from their paycheck via their place of employment
  • Every single person who pursues a career or runs a business, regardless of whether they make a profit or a loss

Is it necessary for me to file a tax return?

If your income exceeds the threshold; you must file a tax return. Your income tax is computed based on the money you make that is more than the tax-free threshold. The amount of tax you are required to pay is not determined by a straightforward percentage; rather, it is calculated relatively straightforwardly by the Australian Taxation Office (ATO).  

What is the tax-free threshold in Australia?

In Australia, the tax-free threshold is the maximum money you can make in a year without paying income tax. If you make more than the tax-free amount, there are tax rates that show how much income tax you have to pay. Because of Australia's progressive tax scheme, the more money you make, the more income tax you have to pay.

As a result, if you live in Australia and file your taxes in 2024, the first $18,200 of your income is tax-free. You won't have to pay taxes if your total income is less than $18,200. Usually, you have to pay tax on the amount over $18,200. For easy understanding, the tax-free amount of $18,200 is $350 a week, $700 every two weeks, or $1,517 a month.

Income level Tax rate
Taxable income up to $18,200 no tax
Taxable income between $18,201 to $45,000 16%
Taxable income between $45,001 to $135,000 30%
Taxable income between $135,001 to $190,000 37%
Taxable income Above $190,000 45%

This new tax bracket 2024 will be implemented for the 2024/25 tax season

How can I claim the tax-free threshold?

According to the Australian Taxation Office (ATO), submitting a claim for the tax-free threshold is typically not the most challenging task. Any time you begin a new employment or submit an application for a new Centrelink payment, you will be provided with a "tax file number declaration form" that you must fill out. Simply respond "Yes" to the question "Do you want to claim the tax-free threshold from this payer?" on the form. The form will then be returned to the appropriate department for processing after completing that step. 

If I have multiple jobs, can I claim a tax-free hold on every one of them?

In most situations, this is not possible because the standard practice is to claim the tax-free threshold on only one employment at a time. The Australian Taxation Office (ATO) informs individuals who have two or more sources of income during the same fiscal year that they can only claim the tax-free threshold from the payer who normally pays the highest salary or wage. You can only claim the tax-free threshold from each payer if you are certain that the total amount of your annual income from all payers will be less than $18,200. If, on the other hand, your annual income is more than $18,200, you will be required to fill out a withholding declaration form and hand it over to one of your employers. This will inform them that you will no longer be claiming the tax-free threshold from your income. Consequently, you will be able to avoid paying taxes on your additional income.

If you do not comply with this, you risk being undertaxed, requiring you to pay more taxes at the end of the fiscal year to make up the difference.

The Australian Taxation Office (ATO) warns that this could potentially result in you being overtaxed during the year; however, any funds that were withheld more than what was required would be reimbursed to you at the end of the year in the form of a tax refund once you have finished filling out and submitting your tax return.

This is how the tax-free threshold is calculated

In Australia, your income tax is calculated based on the taxable income you earn throughout a fiscal year, which begins on July 1 and ends on June 30. The term "taxable income" refers to income subject to taxation and includes sources such as salary, company profits, rental income, and investment income, minus any deductions allowed. If you have overpaid your taxes, you may be eligible for a tax refund when you submit your yearly tax return to the Australian Taxation Office (ATO). You may have a tax liability if your employer did not withhold enough tax from your paycheck during the income year.

To calculate your income tax, you must first determine the income subject to taxation. You can accomplish this by subtracting from your total income any exemptions and deductions that you are eligible for, such as fees for investment management. After you have determined the amount of income subject to taxation, you can consult the tax tables made available by the Australian Taxation Office (ATO) to determine the amount of tax owed.

How to claim the tax-free threshold?

If you meet the tax-free income threshold, you can claim it when you file your yearly tax return. The Australian tax-free threshold can be claimed on the tax return of any Australian resident for tax reasons. It is especially important for those whose total income is below the tax-free threshold during the specified fiscal year. If you are in the bracket entitled to claim the tax-free threshold for the fiscal year 2023-2024, the first $18,200 of your taxable income is freed from income tax. However, any income sources that increase your earnings above this threshold will be subject to the current income tax rates.

What consequences will result from my failure to claim the tax-free threshold?

If you do not file any claims against the tax-free threshold within a particular fiscal year, you risk being compelled to pay income tax on all your earnings. Because Australia's income tax rates are based on the assumption that you use the tax-free threshold to avoid paying tax on the first $18,200 of your earned income, you will most likely pay more tax than necessary during the year.

Even if you complete and submit your tax return, the ATO will most likely grant you a refund for the amount of tax you overpaid. However, you will still be expected to make additional tax payments during the year. The Australian Taxation Office (ATO) states that if you want to reduce the tax deducted from your salary in the future, you can fill out a PAYG withholding modification application form.

Pros and Cons of the tax-free threshold

The tax-free threshold has pros and cons, like everything related to taxes. These are a few of the most important.

Pros of the Tax Free Threshold
Pros Cons
You will have more money It’s for just a job
Shows how much tax you owe Less money back or a bigger bill
You won't have to pay taxes _

Pros

1. You will have more money

Having more money in your pocket during the tax year is one of the best reasons to claim the quota. If you claim it, less tax will be taken out of your pay each time you get paid, giving you more money to spend.

2. Shows how much tax you owe 

If you claim the tax-free threshold, you might find that the tax taken out of your income is more in line with what you need to give the ATO at the end of the financial year. You could get a tax bill if not enough tax is taken out of your pay each time.

3. You won't have to pay taxes

If you earn less than $18,200 a year and claim the tax-free threshold, you probably won't have to pay any tax, and your take-home pay won't have been taxed. It's a win-win situation.

Cons

1. Less money back or a bigger bill

You'll have to pay more tax on your income as it comes in if you don't collect the tax-free amount. You may have a smaller tax bill at the end of the year, though. You could also get a tax return, and it might be a bigger one.

2. It’s for just a job

The ATO usually tells Australians who have more than one job to only claim the tax-free threshold on the job that pays them the most each year.

Conclusion

The tax-free threshold might not be the most interesting thing ever, but it can greatly affect your financial situation. How much tax you pay on each dollar you earn and how much you get back (or owe) at tax time depends on whether you claim it. The tax-free threshold lets people make a certain amount without paying income tax. This helps a lot of Australians save money. It's important to know that this exemption threshold isn't the same for everyone. Things like residency status and sources of income can affect eligibility. People need to make sure they follow Australian tax laws and make the most of their tax planning strategies by keeping current on tax rules and getting professional help when needed.

Consider partnering with The Kalculators if you need personalised help understanding and handling your Australian tax responsibilities. Our expert advisors can give you personalised advice to help you understand tax laws, make the most of your money, and ensure you follow all the rules. To find out more and set up a meeting, get in touch with us today! 

Frequently asked questions

Does everyone who pays taxes meet the tax-free threshold?

No, you can't just get the tax-free threshold. You have to meet certain requirements, such as proving where you live, making a certain amount of money, and using any exemptions or offsets that apply. The tax-free threshold is usually given to people who live in Australia for tax reasons.

What happens if I make more money than the amount that doesn't get taxed?

If your income is higher than the tax-free amount, you must pay income tax on the amount. The Australian Taxation Office (ATO) helps people figure out and take care of their tax obligations by giving them advice and tools.

Can I get the tax-free amount if I have more than one job?

People who have more than one job can only get a tax-free amount from one company at a time. If you have more than one job, make sure that only one of them uses the tax-free threshold so that you don't pay too little in taxes.

What happens if I claim the tax-free threshold wrong?

Not correctly claiming the tax-free threshold, like claiming it with multiple employers at the same time or when you are not eligible to, can lead to underpayment of taxes and possible penalties from the Australian Taxation Office (ATO). To avoid compliance issues and financial consequences, it's important to correctly determine if you qualify for the tax-free threshold and apply it properly.

Does the amount that isn't taxed change over time?

The tax-free amount could change if the law is changed, the government makes policy changes or inflation rates are changed. It's best to keep up with the latest tax laws and rules, so you know about any changes to the tax-free threshold and how they might affect your finances.  

 

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About the Author / By Kaleem Ulah

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Kaleem is CEO & Author at "The Kalculators". With more than 10 years of experience in financial services, He built Kalculators to transform your financial challenges into strategic triumphs!

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