If you’re an Australian taxpayer, understanding the tax-free threshold will help you manage your finances better and not pay too much. Let’s dive in and find out the tax-free threshold, how it works, and why it matters to you.

What is the Tax-Free Threshold?

The tax-free threshold is the amount you can earn tax-free each financial year. In Australia, as of 2024, this is $18,200. So, if you’re an Australian resident for tax purposes, you won’t pay any tax on the first $18,200 you earn in a financial year.

The tax-free threshold is a fixed amount that is adjusted annually, and it applies to all taxable income earned from 1 July of each year.

How the Tax-Free Threshold Works

Australia has a progressive tax system where the amount of tax you pay increases as your income increases. The tax-free threshold is the base of this system. Here’s a simple breakdown:

• You pay no tax on the first $18,200 you earn.
• For income above $18,200, you start paying tax at increasing income tax rates.
• For example, if your annual income is $30,000, the first $18,200 is tax-free, and you only pay tax on the remaining $11,800.

This helps lower-income earners keep more of their earnings, and those with higher incomes contribute more to the tax system.

Eligibility for the Tax-Free Threshold

To be eligible for the full tax-free threshold, you must be an Australian resident for tax purposes for the entire financial year. If you become or stop being an Australian resident during the year, you’re entitled to a pro-rata tax-free threshold.

For part-year residents, the tax-free threshold is calculated like this:

• $13,464 flat amount
• Plus up to $4,736 adjusted for the number of months you were an Australian resident.

This pro-rata system means people who aren’t residents for the full year still get a portion of the tax-free threshold.

Claiming the Tax-Free Threshold

When you start a new job, you’ll usually fill out a Tax File Number Declaration form. On this form, you can claim the tax-free threshold. If you have multiple jobs, it’s best only to claim the tax-free threshold from one employer. This will prevent you from ending up with a tax debt at the end of the financial year.

If you forget to claim the tax-free threshold or your circumstances change, don’t worry. You can still claim it when you lodge your tax return at the end of the financial year.

How Tax Withholding Works

Tax withholding is when your employer withholds a portion of your income and pays it to the ATO on your behalf. The amount of tax withheld depends on your income level and the tax rates that apply to you. 

If you have multiple jobs or income sources, you may need to adjust your tax withholding to avoid an unexpected tax bill at the end of the year. You can complete a PAYG withholding variation application and submit it to your employer. Proper management of tax withholding ensures that you are not left with a large tax debt when you lodge your tax return.

Benefits of the Tax-Free Threshold

The tax-free threshold has several benefits:

• More take-home pay: You get to keep more of your earnings, which is great for low-income earners.
• Less tax: It reduces your overall tax rate.
• Simpler tax returns: If you earn under $18,200, you might not need to lodge a tax return.

These benefits make the tax-free threshold an important part of the Australian tax system, especially for those with lower incomes or who are part-time workers.

Tax Rates and Thresholds 2024-25

Here are the current tax rates and thresholds for Australian residents:

Your annual taxable income determines which tax bracket you fall into and how much you must pay.

These rates don’t include the Medicare levy of 2%, which most Australian residents pay on top of their income tax.

Special Considerations

• Medicare Levy: Most Australian residents pay a 2% Medicare levy in addition to their income tax. This levy funds Australia’s public health system. The Medicare levy is calculated based on your taxable income, so it doesn’t apply to the tax-free threshold part of your earnings. In addition to the Medicare levy, some individuals may also be required to pay the Medicare levy surcharge if they do not have adequate private health insurance.
• Tax Offsets: Various tax offsets can reduce your overall tax. For example, the Low and Middle Income Tax Offset (LMITO) gives extra tax relief to eligible taxpayers. These offsets can increase the amount you can earn before you pay tax and work alongside the tax-free threshold to reduce your overall tax.

Multiple Jobs and the Tax-Free Threshold

If you have multiple jobs, you should only claim the tax-free threshold from your highest-paying job. If you claim it from multiple employers, you might not have enough tax withheld throughout the year and end up with a tax debt when you lodge your return.

You’ll pay tax from the first dollar you earn for your second and subsequent jobs. While this might seem unfair, it helps ensure you pay enough tax yearly to cover your total tax liability.

Change of Job During the Income Year

If you change jobs during the income year, your previous employer will stop paying you, and you will start receiving income from your new employer. 

You can claim the tax-free threshold from your new employer even if you have claimed it from your previous employer. To choose whether to claim the tax-free threshold from your new employer, complete a tax file number (TFN) declaration. 

Your payer will determine how much tax to withhold from their payments to you. This ensures that you continue to benefit from the tax-free threshold without interruptions.

Part-Time and Casual Workers

The tax-free threshold is especially good for part-time and casual workers. If you earn under $18,200 per year, you might not have to pay any income tax. But you might still need to lodge a tax return to get back any tax that was withheld from your pay.

Students and the Tax-Free Threshold

For students who work part-time or casually, the tax-free threshold can be a big help. It allows you to earn a reasonable amount from part-time work without paying tax,, which can greatly help when balancing study and work commitments.

Tax-Free Threshold and Superannuation

Note that the tax-free threshold applies to your taxable income and doesn’t include employer superannuation contributions. These are taxed separately at 15% for most people. Understanding this will help you plan for your retirement savings while maximising the tax-free threshold on your take-home pay.

Tax Offsets and Deductions

Tax offsets and deductions can help reduce your taxable income and lower your tax bill. Tax offsets directly reduce the amount of tax you pay, while deductions reduce your assessable income. Common tax offsets include the Low Income Tax Offset (LITO) and the Low and Middle Income Tax Offset (LMITO). 

Deductions include work-related expenses, the cost of managing your tax affairs, gifts and donations, interest, dividends, and other investment income deductions. 

To claim tax offsets and deductions, you must keep accurate records and submit them with your tax return. This can significantly reduce your overall tax payable, making understanding and utilising these benefits essential.

Frequently Asked Questions

Can I claim the tax-free threshold if I’m not an Australian resident?

No, non-residents are not eligible for the tax-free threshold. They pay tax on every dollar earned in Australia, starting at 32.5% for income up to $120,000.

What happens if I don’t claim the tax-free threshold?

If you don’t claim the tax-free threshold your employer will withhold tax from your entire income at a higher rate. But you can get back any overpaid tax when you lodge your tax return.

How does the tax-free threshold work with superannuation?

The tax-free threshold applies to your taxable income, which doesn’t include employer superannuation contributions. These are taxed separately at 15% for most people.

Can I claim the tax-free threshold if I’m under 18?

Yes, you can claim the tax-free threshold if you’re under 18. However, different tax rates may apply to minors’ unearned income (such as interest or dividends).

Key Points

• The tax-free threshold is $18,200.
• Australian residents, for tax purposes, get the full tax-free threshold.
• Part-year residents get a pro-rata tax-free threshold.
• Only claim the tax-free threshold from one employer if you have multiple jobs.
• The tax-free threshold is part of the progressive tax system.
• Remember to include the Medicare levy and tax offsets in your calculation.
• Consider the private health insurance rebate when calculating your overall tax liability.