What Is The Tax-Free Threshold?

If you’re earning an income in Australia, it’s important that you get your head around the tax-free threshold and how it could affect your finances.

If you’re an Australian resident with a tax file number (TFN), you could be liable to pay tax – although as the Australian Taxation Office (ATO) stipulates, a number of factors affect whether you actually will end up paying tax, and the tax-free threshold is a big one.

What is the tax-free threshold?

The tax-free threshold, according to the ATO, refers to the dollar amount limit you can earn each financial year without being liable to pay tax. If you’re an Australian resident for tax purposes, the tax-free threshold is currently $18,200, meaning the first $18,200 of your income for the financial year is not taxed – it is tax-free.

That being said, the yearly figure isn’t particularly helpful for figuring out if you’ll have to make pay-as-you-go (PAYG) installments on your regular income.Based on ATO figures, here are the equivalent tax-free thresholds as they apply to more regular intervals:

  • If you’re paid weekly, you’ll pay tax on any earnings above $350
  • If you’re paid fortnightly, you’ll pay tax on any earnings above $700
  • If you’re paid monthly, you’ll pay tax on any earnings above $1,517

You can also use our income tax calculator to get an idea of the tax you’ll pay on your annual income.

Calculate Your Income Tax For The Year

It’s important to note, however, that your employer doesn’t automatically calculate your tax liability using the tax-free threshold. As the ATO states, it’s something you have to actively claim when you start a new job or apply for a Centrelink payment, otherwise PAYG tax will be calculated from the first dollar, regardless of how much or little you earn.

How do I claim the tax-free threshold?

As outlined on the ATO website, the good news is that claiming the tax-free threshold should be simple. Whenever you start a new job or apply for a new Centrelink payment you’ll be given a ‘tax file number declaration’ form to complete, and all you have to do is answer ‘Yes’ to question 8 – ‘Do you want to claim the tax-free threshold from this payer?’

Can I claim the tax-free threshold on more than one job?

Standard practice is to claim the tax-free threshold on one job at a time. The ATO says that in the case of people with two or more income sources, “we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage”. Only if you’re certain your total annual income from all payers will be less than $18,200 can you claim the tax-free threshold from each payer.

If you claim the tax-free threshold from one employer only, your second income stream and any other sources of income beyond that will be taxed at the higher, ‘no tax-free threshold’ rate. The ATO notes that this may possibly lead to you being overtaxed, but that any excess withheld funds will be returned to you at the end of the financial year in the form of a tax refund.

If you think your taxable income for the year might end up falling just above the tax-free threshold, one of the ways you may be able to reduce your taxable income is making concessional (pre-tax) contributions to your superannuation, although you may want to seek professional tax advice that’s specific to your situation before making a decision. We’ve outlined the process of making voluntary super contributions here, but before you start making contributions it’s important that you choose a super fund that suits your individual circumstances.

The following table contains details of the superannuation funds rated by Canstar based on someone aged 40-49. This table has been sorted by one-year performance (highest to lowest). When selecting a super fund, bear in mind that investments can go up and down, so past performance is not necessarily indicative of future performance.

Please note that the performance information shown in the table is for the investment option used by Canstar in rating of the superannuation product.

To view the past performance of all super funds, rated by Canstar, use our comparison tool:

Compare Superannuation Funds

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