What is the tax-free threshold?
The tax-free threshold is the amount of income you can earn before you are required to pay income tax. In Australia, this threshold is currently $18,200 per financial year. This means if your taxable income is $18,200 or less, you won’t need to pay income tax.
If you are a non-resident or a minor for all or part of the financial year the threshold is not $18,200 and we suggest you speak to your accountant.
Should I claim the tax-free threshold?
For most people, the answer is yes. By claiming the tax-free threshold, you don’t pay tax on the first $18,200 you earn each year. This reduces the amount of tax withheld from your earnings, giving you more take-home pay throughout the year.
However, if you have multiple sources of income, you should only claim the tax-free threshold from one income source. Claiming it from multiple sources could result in underpaying tax, leading to a tax bill at the end of the financial year.
What happens if I don’t claim the tax-free threshold?
If you don’t claim the tax-free threshold, your employer will withhold more tax from your income, leaving you with less money in your pocket each pay cycle. At tax time, the Australian Taxation Office (ATO) will calculate your tax based on your total earnings and will refund any excess tax your employer withheld.
Some people choose not to claim the tax-free threshold if they expect to have multiple sources of income. This can help prevent a tax bill at the end of the financial year by ensuring more tax is withheld throughout the year.
Who can claim the tax-free threshold?
The tax-free threshold is available to Australian residents for tax purposes, including sole traders. However, it does not apply to companies, partnerships, or trusts and in certain circumstances minors under the age of 18 do not have the same
Depending on the source of the income the minors are sometimes not entitled to the $18,200 tax free threshold.
How does the tax-free threshold work for sole traders?
As a sole trader, your business income is treated as personal income. If your total taxable income (including business profits) remains below $18,200, you won’t need to pay any income tax.
Example:
- If your total taxable income is $17,000, you won’t pay any income tax.
- If your total taxable income is $25,000, you will only pay income tax on the amount exceeding $18,200 ($6,800 taxed at 16%).
This means that as your business grows and your income increases, you will need to account for tax payments.
Can companies and partnerships claim the tax-free threshold?
No, if you operate under a business structure other than a sole trader, you cannot claim the tax-free threshold.
What if you have multiple income sources?
If you earn income from more than one source (e.g. a salary and a side business), you need to decide which source will apply the tax-free threshold.
- You can only claim the tax-free threshold from one job or income source.
- If you claim it from multiple sources, too little tax will be withheld, and you could end up with an unexpected tax bill.
Do I Claim the Tax-Free Threshold for a Second Job?
No. If you have multiple jobs or start a new job partway through the financial year, only claim the tax-free threshold from one job. Each employer only withholds tax based on the information you provide. They don’t know how much tax you’ve paid elsewhere, so it’s your responsibility to manage your tax withholding correctly.
How do you claim the tax-free threshold?
You can choose to claim or not claim the tax-free threshold on the tax file number (TFN) declaration you give to your payer.
Do I need to lodge a tax return if I earned less than the tax-free threshold?
If you earned less than $18,200 but paid tax:
Yes, you must lodge a tax return to claim a refund on the tax you paid. Even though your income is below the threshold, lodging a return allows you to recover any tax withheld from your earnings.
If you earned less than $18,200 and paid no tax:
You may not need to lodge a tax return. However, always check with your accountant as it depends on individual circumstances. You must submit a Non-Lodgement Advice to the ATO to confirm you don’t need to file a return. This prevents unnecessary follow-ups from the ATO. Non-Lodgement Advice forms can be submitted for free via the ATO’s online services.
Should you get professional tax advice?
An accountant will help you plan your tax in advance so you can make the right decisions and not getting hit with an unexpected tax bill from the ATO. They will help you understand if and when to claim the tax-free threshold amongst other important factors.
