What is the tax-free threshold in Australia?

TOM LETTS
Sub Editor · 26 February 2021
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 taxfree 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?’

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. 

Total taxable income Tax rate
$0 – $18,200 No tax
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $90,000 $3,572 plus 32.5c for each $1 over $37,000
$90,001 – $180,000 $20,797 plus 37c for each $1 over $90,000
$180,001 and over $54,097 plus 45c for each $1 over $180,000
Source: ATO, 2020, effective for Australian residents in the 2020/21 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. 

If you’re comparing superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.

Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group specified above.

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.

Learn more about superannuation:

Cover image source: wichayada suwanachun/Shutterstock.com.

This article was originally written by James Hurwood. It was reviewed by our Finance Editor Sean Callery before it was updated, as part of our fact-checking process


About Tom Letts

Tom LettsAs a Sub Editor at Canstar, Tom strives to help the team communicate its wealth of finance knowledge to the world in a way that is engaging, informative and accurate. Tom seeks to make sure consumers get the full picture on a range of money matters. Tom holds a Bachelor of Arts (French and International Relations) and a Bachelor of Laws (Honours) from The University of Queensland, and previously spent around six years working as a quality assurance manager at Pacific Transcription, a global transcription company based in Brisbane. In his downtime, Tom enjoys learning languages, planning holidays and following election coverage.

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