As a business owner or accounts professional in Australia, you need to know about the tax-free threshold and how it affects your employees’ pay. And it all starts with the latest information on tax declarations, income assessments, and potential tax liabilities.

Out of all these details you need to keep up to date with, the tax-free threshold is one of the most important, making up a big part of Australia’s progressive tax system.

In this article, we’ll look into the tax-free threshold – what it is, how it works and what you need to know as an employer or payroll manager. We’ll also cover part-year residents and non-residents too.

What is the Income Tax-Free Threshold in Australia?

The tax-free threshold is the amount an individual can earn in a year tax-free. For the 2023-24 year, it’s $18,200. So if someone earns $18,200 or less in a year, they won’t pay income tax on that.

Source: Taxcuts.com.au

The tax-free threshold is part of Australia’s progressive tax system, which reduces the tax on low-income earners by allowing a portion of income to be earned tax-free, allowing low-income people to have more money for the essentials.

How the Tax-Free Threshold Works

So, how does the tax-free threshold work in real life with respect to taxable income? Let’s break it down:

• The first $18,200 of the year is tax-free
• That’s $350 per week, $700 per fortnight or $1,517 per month Once an individual’s taxable income is above the tax-free threshold, they’ll pay tax on the amount above $18,200. Tax rates increase progressively according to the brackets below:

(Note: The brackets are for the 2023-24 year, and this is subject to annual change thereafter.)

Example

An employee earns $50,000 per year. They won’t pay tax on the first $18,200. But they’ll pay 19% tax on the $31,800 above $18,200 ($45,000 – $18,200) in the second bracket.

Claiming the Tax-Free Threshold on Your Tax Return

When an employee starts a new job, one of the first things they’ll do is fill out a Tax File Number Declaration form. That form asks for the Tax File Number (TFN) and whether they want to claim the tax-free threshold from their employer.

Filing an income tax return at the end of the year is vital for reporting all sources of income and ensuring accurate tax calculation, especially when claiming the tax-free threshold.

Employees need to know they can only claim the tax-free threshold from one employer at a time. If they have multiple jobs and claim the threshold from more than one employer, they’ll have a higher tax bill at the end of the year.

But there’s an exception to this rule. If an employee’s total income from all jobs is less than $18,200 for the year, they can claim the threshold from each employer without problems.

Payroll Considerations for Employers

As an employer, you need to withhold the right amount of tax from your employees’ pay based on their tax-free threshold claim. Here are the things to consider:

• All new employees must complete the Tax File Number Declaration form when they start with you
• Withhold tax at the correct rate according to the employee’s tax-free threshold claim, ensuring you know how much tax to withhold from their paychecks
• Employees with multiple jobs should only claim the threshold from one employer to avoid a higher tax bill
• Educate and help your employees make good tax decisions

Tax-Free Threshold for Part-Year Residents and Non-Residents

The tax-free threshold works slightly differently for part-year residents and non-residents for tax purposes.

Part-year residents and non-residents still need to fill and file a tax return to ensure they meet their tax obligations and avoid any penalties.

For part-year residents, the threshold will be between $13,464 and $18,200 depending on how many days they spent in Australia in the year. The Australian Taxation Office (ATO) has a part-year tax-free threshold calculator to help with that.

By being on top of these and talking to your employees, you’ll have payroll sorted and no tax issues later.

Key Points

• 2024-25 threshold is $18,200
• Income above the threshold is taxed progressively across brackets
• Employees should only claim the threshold from one employer to pay less tax
• Employers must withhold according to the employee’s threshold claim
• Part-year residents have a varying threshold; non-residents have no threshold at all
• Individuals may receive a tax refund if their income is below the tax-free threshold

Non-residents aren’t eligible for the tax-free threshold at all. So non-resident employees will have tax withheld from their first dollar earned in Australia at the non-resident rates.