Guide to Australia's Tax-Free Threshold

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The tax-free threshold represents the yearly income you can earn without incurring income tax. For the 2023-2024 fiscal year in Australia, this threshold is set at $18,200. Consequently, if your annual earnings are below this figure, you won’t be subjected to income tax. However, if your income surpasses this limit, you’ll be taxed on the exceeding amount.

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In Australia, the tax-free threshold varies between residents and non-residents. Typically, non-residents don’t qualify for the tax-free threshold.

How income tax is calculated

Income tax in Australia is based on the taxable income you earn during a financial year (1 July to 30 June). Taxable income, for tax purposes, includes sources such as salary, business proceeds, rental, and investment income, less any permitted deductions. If for some reason you’ve overpaid, a tax refund may be in order when you file your annual tax return with the Australian Taxation Office (ATO). However, if not enough tax was withheld by your employer during the income year, you might end up with a tax debt.

To figure out your income tax, start by determining your taxable income. This is done by deducting exemptions and deductions, such as investment management fees, you’re entitled to from your total income. Once you’ve got your taxable income, you can refer to tax tables provided by the ATO to see how much tax is payable.

The tax rate applied depends on your income bracket. Australian residents are acquainted with the five tax brackets:

0% tax on taxable income up to $18,200 (claiming the tax-free threshold)
19% tax on taxable income between $18,201 and $45,000
32.5% tax on taxable income between $45,001 and $120,000
37% tax on taxable income ranging from $120,001 to $180,000
45% tax on taxable income above $180,000

A table outlining Australia's income tax brackets: Rates range from 0% to 45% depending on taxable income. The five brackets are defined by income thresholds, such as 0% up to $18,200 and 45% above $180,000.

Additionally, many are also subject to the Medicare levy, a 2% tax on taxable income, aimed at supporting Australia’s healthcare system.

Note: The above tax rates are valid for the 2022-2023 financial year. However, from 1 July 2024, the structure will see a revision to four tax brackets:

0% tax on taxable incomes up to $18,200
19% on incomes from $18,201 to $45,000
30% on those between $45,001 and $200,000
45% on incomes surpassing $200,001.

A table illustrating updated income tax brackets: Rates vary from 0% to 45%, segmented by income ranges like 0% for up to $18,200 and 45% for over $200,001.

How to claim the tax-free threshold

If you qualify for the tax-free threshold, you can stake your claim when filing your annual tax return. The tax-free threshold can be claimed on the tax return of anyone who is an Australian resident for tax purposes. It’s especially pertinent for those whose total income remained under the tax-free threshold during the designated financial year.

If you’re in the bracket eligible to claim the tax-free threshold for the 2023-2024 financial year, the first $18,200 of your taxable income is exempt from income tax. However, any income sources pushing your earnings above this amount will be subject to the prevailing income tax rates.

The tax-free threshold’s impact on PAYG withholding tax

If you juggle multiple jobs, it’s standard practice to only claim the tax-free threshold from one employer. Usually, this is from the employer offering the highest salary. The rationale behind this is that income from your other income sources or second job will be taxed at the highest marginal tax rate.

Upon filing your annual tax return, the tax withheld from all your income sources will be evaluated. Based on this assessment:

If too much tax was withheld, you might be eligible for a tax refund.
If not enough tax was held back, you may receive a tax bill, necessitating payment of the difference.

For a more accurate reflection of your end-of-year tax liability, you can ask for adjustments in the tax withheld from your regular income.

If your income is $18,200 or less

If you’re confident that your total income from all employers for the financial year, inclusive of any other income sources, won’t exceed $18,200, you can opt to claim the tax-free threshold from each payer.

Yet, if circumstances change and your annual income crosses the $18,200 threshold, it’s essential to hand a withholding declaration to one of your employers, signaling your intention to cease claiming the tax-free threshold from them.

Example: if your income is $18,000 or less

During the 2022-2023 financial year, Walter receives a taxable pension amounting to $10,000 ($384.61 per fortnight) and earns from a part-time job that pays $8,000 ($307.69 per fortnight).

For his pension, he exercises his right to claim the tax-free threshold, leading to no tax being withheld.

However, for his part-time job where he doesn’t claim the tax-free threshold, $64 will be held back every fortnight as tax withheld.

Consequently, Walter’s cumulative taxable income for the financial year stands at $18,000. Due to his total income falling under the tax-free threshold, he won’t face any income tax liability, meaning a tax payable of zero. Upon filing his 2023 income tax return, he will be entitled to a tax refund, equating to the sum total of tax that was withheld over the year.

Forecasting the same income scenario for the upcoming financial year, Walter has the option to claim the tax-free threshold for his part-time work too. To action this, he simply needs to fill out a withholding declaration and present it to his employer. This will ensure no tax is subtracted from his pay.

Example: If your income is over $18,200 and too much tax is withheld

If your annual income exceeds $18,200 and an excessive amount of tax is withheld from your payments, there’s an avenue to seek rectification. You can initiate the process by completing a PAYG withholding variation application and forwarding it to the designated tax authority.

Upon submission, the Australian Tax Office (ATO) will assess your application. After the evaluation, they will determine the adjusted amount and communicate updated instructions to your payers on how much tax to withhold from your income sources.

It’s paramount to apply for this variation only when you’re confident about your projected total income and feel the current withholding rates are leading to a financial disadvantage.

Example: too much tax withheld during the year

Anna has two jobs during the 2022-2023 financial year. In her role as a part-time retail sales assistant, she amasses a regular income of $16,000 ($615.38 per fortnight). In addition, her role in a restaurant brings in $10,000 ($384.62 per fortnight) as her other income.

Taking advantage of the tax-free threshold, Anna claims it from her retail employer, which results in no tax withheld for that income source.

For her restaurant job, however, she doesn’t claim the tax-free threshold, leading to a deduction of $82 per fortnight. This amounts to a total of $2,132 withheld for tax purposes over the financial year.

Without any other income sources, Anna’s tax liability or potential tax refund will be determined when she lodges her annual tax return. The calculation, considering her total income and the amount of tax withheld, goes as follows:

Taxable income: $26,000

Income tax due based on tax rates for $26,000: $1,482

Subtracting the Low income tax offset: $700

Further reduction from the Low and middle income tax offset: $675

Adding the Medicare levy: $263.50

Sum of total tax and Medicare levy: $370.50

Accounting for total tax withheld: $2,132.00

Tax refund amounting to: $1,761.50

A case study showing Anna's tax situation for the 2022-2023 financial year: Working two jobs with different tax arrangements, she ends up having too much tax withheld, resulting in a substantial tax refund of $1,761.50 after considering various tax offsets and the Medicare levy.

Anna can anticipate a tax refund of $1,761.50, stemming from too much tax withheld during the income year. Should she foresee similar financial circumstances in subsequent financial years, Anna could consider a withholding variation. This would adjust the tax withheld from her pay, affording her more net pay throughout the year instead of a lump sum tax refund at the end of the year.

Addressing Potential Tax Shortfalls

If the total tax withheld from your payments throughout the year doesn’t sufficiently cover your tax liability for the financial year, you could face a tax debt when the year concludes.

To circumvent this scenario, consider requesting one or several of your payers to enhance the withholding amount from your payments. Ensure your request is documented, whether it be through electronic methods like email, traditional paper mediums, or computer-based forms.

Example: Addressing Potential Tax Shortfalls

Pierce receives a taxable pension and has a part-time job. Over the course of the 2022–23 income year, he receives:

$30,000 from the pension – Pierce’s payer applies the Medicare levy and tax-free threshold to his fortnightly payments.
$30,000 from the part-time job – Pierce’s employer applies the Medicare levy and no tax-free threshold to his fortnightly payments.

A scenario examining Pierce's tax status in 2022-23: He earns equal amounts from a taxable pension and a part-time job, with differing tax treatments, including the application of the Medicare levy and the tax-free threshold.

At the end of the income year, the total tax withheld from Pierce’s income will be $9,828 ($378 × 26).

When Pierce lodges his tax return for the income year, the actual amount of income tax he has to pay, or tax refundable to him, will be calculated as follows:

Taxable income $60,000

Income tax payable $9,967

Less, Low income tax offset $100

Plus, Medicare levy (2% of $60,000) $1,200

Total tax and Medicare levy $11,067

Credit for total tax withheld $9,828

Tax payable $1,239

A detailed example showing Pierce's end-of-year tax calculation for 2022-23: With a taxable income of $60,000 and $9,828 withheld, his calculated total tax and Medicare levy amounts to $11,067, resulting in a tax payable of $1,239.

How can I reduce my taxable income?

There are a number of ways you can reduce your taxable income in Australia:

Maximise Tax Deductions

Tax deductions play a pivotal role in reducing your taxable income. These are expenses incurred directly in the pursuit of earning your income. Some common deductions encompass work-related travel, essential tools and equipment for your profession, and investment management fees for self-education expenses.

Enhance Superannuation Contributions

Your superannuation contribution, or super fund, usually face a lower tax rate than your regular income. By making extra contributions to your super, you can effectively lower your taxable income.

Delve into Salary Sacrificing

Opting for salary sacrificing means you agree to take a portion of your annual income as a benefit, not in cash. This strategy can cut down your taxable income since some benefits might be subjected to lower tax rates compared to your highest salary. Delving deeper into the implications of the Fringe Benefits Tax is essential, as outlined in our detailed article on the topic.

Leverage Tax Offsets

Tax offsets, often referred to as rebates, are specific amounts deducted from the total tax you’re liable to pay. Australia offers a variety of tax offsets, including the low-income tax offset and the senior Australians tax offset. By understanding and claiming the tax-free benefits you’re eligible for, you can significantly reduce your tax bill.

Deductions

Tax offsets or credits, also known as tax offsets, reduce the amount of tax that you owe on your taxable income. In contrast, deductions lower your total income, which is assessed for tax purposes.

By reducing your assessable income or amplifying your deductions, you can effectively lower your taxable income. For instance, negative gearing enables you to offset an investment loss against other income, leading to increased deductions and a decrease in taxable income. On the other hand, opting for salary sacrificing some of your annual income into superannuation decreases your assessable income. This strategy results in an indirect reduction of your taxable income for the financial year.

Should you decide to make personal tax-deductible contributions to your superannuation fund, taking into account the annual limit of $27,500, you can claim the tax-free deduction. This is done by completing an ATO form and forwarding it to your super fund. Subsequently, your super fund will tax your contribution at a concessional tax rate of 15%, a rate much more favorable than most individual income tax rates.

For Australian residents, it’s crucial to maintain records of your tax deductions for a minimum of five years. This is vital if you’re audited by the ATO and are required to validate your claim.

Low-Income Tax Offset

Low-income earners benefit from the low-income tax offset, which effectively raises their tax-free threshold. For incomes up to $37,500 annually, this can lead to a $700 offset. This means the first $21,884 of earnings in the fiscal year remains tax-free

Assessable Income: Understanding Your Taxable Earnings

Assessable income signifies the collective sum of money accrued in a financial year that falls under the umbrella of income tax liability. This encompasses a diverse array of income streams such as employment wages, super pensions and annuities, remunerations from the government, investment income, proceeds from business operations, partnership and trust funds, earnings from overseas, and revenue generated through crowdfunding.

Certain categories of assessable income, like employment wages, are directly communicated to the ATO by respective employers and financial establishments.

Employment income

Employment Income encompasses the monetary gains you obtain from full-time, part-time, or casual engagements, including:

Regular compensations such as salary, commissions, bonuses, parental leave pay, and amounts received from job-associated insurance programs like income protection, sickness/accident benefits, or worker’s compensation.
Employer-provided allowances like those for cars, travel, attire, laundry, meals, specific working conditions, or specialised duties/credentials.
Additional revenues like gratuities, awards, or shares provided at an employee discount.
Lump sum compensations, often disbursed for untapped leave upon exiting a position.

If you acquire reportable fringe benefits exceeding $2,000 over a financial year, such as personal use of a company vehicle or your employer addressing certain personal costs as part of a salary package, they too are included. While these fringe benefits need to be declared, they aren’t subject to income tax. Instead, they influence your qualifications for state provisions.

Super pensions and annuities

When you derive a pension from your superannuation fund, it can encompass three distinct segments:

Taxed Element: This portion has undergone taxation.
Untaxed Element: Tax is still pending on this segment.
Tax-Free Element: No tax obligation exists for this section.

Your age determines whether or not you have to declare both taxed and untaxed elements as income within the financial year you receive them. This declaration is crucial for ascertaining your final tax liability or potential refund.

On the other hand, if you secure a steady income from an annuity, it might contain both taxable and tax-free parts. You must declare the taxable segments in your income tax return.

Reporting Government Payments on Tax Returns

When you are a recipient of government allowances such as the Age Pension or carer payments, it’s mandatory to include them in your tax return, regardless of their tax-exempt status. The inclusion is vital as these payments can influence your qualification for other government advantages and tax offsets.

Types of Investment Income

Your investment income can encompass various sources, such as:

Interest: This might be earned from accounts held with banks or other financial entities.
Dividends: Income derived from shares or returns associated with managed funds.
Rental Income: Profits obtained from an investment property you own.
Capital Gains: Any financial gains realised from selling an asset.

Business, Partnership, and Trust Income

Income derived from operating as a sole trader, earnings from partnerships, or distributions from trusts all contribute to your overall personal income.

Foreign Income

For those classified as Australian residents for tax considerations, any foreign income earned is mandated to be reported. This holds true even if such income has already been taxed in another country. The ATO employs credits and specific exemptions to evaluate whether any additional Australian tax applies to such foreign earnings.

Crowdfunding Income

Generating income through crowdfunding platforms for a particular project or enterprise might be taxable. It’s particularly pertinent if the funds raised are related to a business or another scheme aimed at profit.

Non-Assessable Income

Certain types of income aren’t considered part of your assessable income. These include:

Lump sum amounts from insurance policies.
The tax-free portion of qualified termination payments.
Genuine redundancy packages.
Payments for child support or maintenance.

Residency and Taxation in Australia

As an Australian resident for tax purposes during part of the financial year, you’re eligible for a prorated tax-free threshold. This threshold includes a consistent $13,464, supplemented by $4,736 adjusted based on your duration of stay in Australia, counting from the month of your arrival.

Conversely, non-residents can’t claim the tax-free threshold and must pay tax on all their Australian income. Understanding your residency for tax purposes can be challenging. Given any doubts about your tax status, seeking personal financial advice is wise. Our expertise extends to assisting expatriates and those who split their year between overseas and domestic work. This is crucial when preparing to submit an annual tax return and evaluating your taxable income, ensuring you don’t pay too much tax or face unexpected tax bills.

Making Sense of the Tax Free Threshold: Clarity for Taxpayers