The tax-free threshold is the portion of your annual income that is free from tax. In Australia, the tax-free threshold is currently $18,200. This means that your yearly income does not incur tax until you earn more than $18,200. By claiming the tax-free threshold, you are able to reduce the amount of tax that your employer withholds from you. This article explains various factors that affect the tax-free threshold, outlining how you can claim the tax-free threshold in Australia.

Tax Withholdings

All employers are required to withhold payments from their employees and provide the money withheld to the Australian Taxation Office (ATO). This is known as pay as you go (PAYG) withholding. In practice, this helps employees pay their taxes over the course of the financial year, instead of having one big payment to make at the end of the financial year.

When you commence work with your employer, you will need to complete a tax file number declaration, which will help your employer determine what they will need to withhold from your pay. Things the employer will consider are whether you:

  • are claiming the tax-free threshold; and
  • have a HECS-HELP loan to repay.

If you would like to vary your employer’s withholding and adjust the amounts to be withheld, you should complete a withholding variation declaration. This may occur when, for example, your tax residency changes.

Australian Residents for Tax Purposes

Only Australian residents for tax purposes can claim the tax-free threshold. If you are a non-resident for tax purposes during the relevant income year, you are not able to claim the tax-free threshold and are required to pay tax from the first dollar you receive.

An Australian resident for tax purposes is different from a ‘resident’ under immigration laws. While your immigration status may deem you a resident, you may still not be a resident for tax purposes. It is important to know if you are an Australian resident for tax purposes, as this affects your:

  • tax liabilities; and
  • eligibility to claim the tax-free threshold.

If you are living in Australia, it is likely that you are an Australian resident for tax purposes. Similarly, if you are working in Australia, you will probably be considered an Australian resident for tax purposes. So, unless you are leaving Australia permanently, you will likely be eligible to claim the tax-free threshold. The ATO’s residency calculator will help clarify your residency status for tax purposes.

How to Claim the Tax-Free Threshold

If you are an Australian resident for tax purposes, then you are probably eligible to claim the tax-free threshold. When you commence a new job and complete your tax file number declaration, you should select the box on the form that states that you want to claim the tax-free threshold from the employer.

Your employer will factor this in when calculating how much money to withhold. It is expected that the employer will reduce the amount of withholdings because of the tax-free amount.

Part Residents

You are only eligible to claim the tax-free threshold if you are a current Australian resident for tax purposes. Part residents can only claim the tax-free threshold for the amount of time that they lived and worked in Australia.

For example, if you were living and working in Australia for part of the year, and left Australia with the intention to reside elsewhere permanently, then you would only be entitled to claim the tax-free threshold for the part of the year that you resided in Australia.

If you were a resident for part of the year, your tax-free threshold is a minimum of $13,464. The remaining threshold is calculated on a pro-rata basis, based on the number of months that you were an Australian resident for tax purposes.

Multiple Sources of Income

If you receive income from various sources, you are still eligible to claim the tax-free threshold. However, you should only claim the threshold from one employer at a time. Usually, this is the employer that pays you more throughout the financial year.

Subsequent employers will still withhold taxes, but will not account for the tax-free threshold, thereby withholding tax from the first dollar they pay you.

Key Takeaways

If you are an Australian resident for tax purposes, you can claim the tax-free threshold on your income. The tax-free threshold means that you will not pay tax for the first $18,200 that you earn. If eligible to claim the tax-free threshold, you should notify your employer when completing the tax file number declaration. Should you need to make changes to claiming this tax-free threshold, you may complete a withholding variation declaration to vary the amount of tax your employer withholds.

If you have any questions, contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

Maya Lash
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