What happens if you don’t claim the tax-free threshold?
12 Apr 2022
The tax-free threshold is an amount of money you can earn each financial year without needing to pay tax. According to the Australian Taxation Office (ATO) the tax-free threshold is $18,200. This means if you’re an Australian resident for tax purposes, the first $18,200 of your income each financial year is tax-free and you only pay tax if you earn above this amount.
If you’re an Australian resident with a tax file number, the tax-free threshold could help reduce how much income tax you need to pay. Here’s how it works.
How do I claim the tax-free threshold?
The good news is that claiming the tax-free threshold is normally fairly simple, as the Australian Taxation Office (ATO) explains.
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 the question ‘Do you want to claim the tax-free threshold from this payer?’
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Can I claim the tax-free threshold on more than one job?
Generally not – standard practice is to only 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 in the same financial year, “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. However, if your income ends up being more than $18,200 for the year, you would then need to fill out a withholding declaration form and give it to one of your employers, to tell them you aren’t claiming the tax-free threshold from it anymore. If you don’t do this, you may end up being undertaxed, which would mean you have to pay extra tax at the end of the financial year.
On the other hand, if you claim the tax-free threshold from only one employer, 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 during the year, 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 once you do your tax return.
What happens if I don’t claim the tax-free threshold?
If you don’t claim the tax-free threshold at all for a financial year, then you may have to pay income tax on all the money you make. This would most likely result in you paying more tax than you need to during the year, since Australia’s income tax brackets and rates (as shown in the table below) assume you do claim the tax-free threshold to avoid paying tax on the first $18,200 you earn.
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| Total taxable income | Tax rate |
|---|---|
| $0 – $18,200 | No tax |
| $18,201 – $45,000 | 19c for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5c for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37c for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45c for each $1 over $180,000 |
Source: ATO, 2021, effective for Australian residents in the 2021/22 financial year. The above rates do not include the Medicare Levy of 2%.
The ATO will most likely give this overpaid tax back to you as a refund once you do your tax return, but this would still mean you pay more upfront tax during the year. The ATO adds that you can fill out a PAYG withholding variation application form if you want to reduce how much tax gets taken out of your pay packet going forward.
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How does the tax-free threshold apply to PAYG tax?
The yearly tax-free threshold figure of $18,200 is useful to be aware of when you’re doing your annual tax return, but it may not be particularly helpful if you want to figure out whether you need to make pay-as-you-go (PAYG) tax installment payments on your regular income. Instead, the equivalent tax-free cut offs that apply to regular earnings could be useful to know about. Based on ATO figures, these are:
- 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.
It’s important to note, however, that your employer typically won’t automatically apply the tax-free threshold to your earnings. 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 how little you earn.
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Cover image source: wichayada suwanachun/Shutterstock.com.
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