Tax-Free Threshold Meaning

The Tax-Free Threshold (sometimes referred to as the Lowest Personal Income Tax Rate) is a term that applies to Australian taxes and refers to the amount you can earn before you will be taxed. Understanding what the tax-free threshold for Australia is important if you want to make sense of the income tax system.

Australians are able to earn an income up to a certain amount before tax becomes payable. This is called the tax-free threshold, and the amount is $18,200. It means that Australians have a limit by which they can earn money each year before they start paying tax on any income above this amount. If you are an Australian resident with a tax file number, the tax-free threshold could be beneficial to you.

How to Claim a Tax-Free Threshold

To claim the tax-free threshold in Australia, you must:

  • Have a tax file number
  • Be an Australian resident
  • Be tax resident in Australia for at least half of the year (you will need to provide proof of the number of days that you were in Australia for the year.)

If you are a non-resident for tax purposes, you will not be able to access the tax-free threshold. This includes Australian citizens based overseas for more than six months in any given year.

Can You Claim it on More Than One Job?

Generally, you can only claim the tax-free threshold from one job. If your total income from all sources is less than $18,200, you can claim the exemption from each source.

However, if you earn more than $18,200 for the year, you may need to fill out a withholding declaration form and inform one of your employers that you will no longer claim the tax-free threshold from your income.

If you claim the tax-free threshold from more than one employer, your second income source and any other sources of income beyond will be taxed at a higher rate.

What if You 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 your income. For example, if you earned $18,200 in Australia in a financial year and claimed the tax-free threshold, and then you earned $19,000 in a later year and did not claim the exemption, the extra $1,000 will be taxed at the top rate of tax.

How the Tax-Free Threshold Affects Your Pay

If you want to calculate how the tax-free threshold will affect your pay, simply aim to work out your gross earnings first. Then, work out how much of your income will be exempt from income tax, and deduct that amount from your gross earnings. You will then be left with your take-home pay.

Get Your Tax-Free-Threshold

The tax-free threshold is a critical aspect of the Australian income tax system. If you are earning an income in Australia, you may be able to claim the tax-free threshold, meaning you don’t have to pay tax on all of your earnings.

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