What is the Tax-Free Threshold in Australia? (2021 Update)
The tax-free threshold in Australia is $18,200. Read this article to find out what the tax-free threshold means for your finances.
Most employed Australians will have to pay tax on their income. This also means you have to make the relevant deductions to minimise your taxable income. However, the tax-free threshold means that you won’t have to pay tax on income you earn below this amount. Further, if you earn below this over the whole financial year, you won’t have to pay tax at all. In this article, we’ll explain what the tax-free threshold is and how it works.
Paying tax in Australia
Australia operates under a progressive tax system, meaning that people who earn more income pay more tax. The current tax brackets are as follows:
- 0 to $18,200 – tax-free
- $18,201 to $37,000 – 19 cents for every dollar above $18,200
- $37,001 to $90,000 – $3,572 plus 32.5 cents for each dollar over $37,000
- $90,001 to $180,000 – $20,797 plus 37 cents for every dollar over $90,000
- $180,001 and over – $54,097 plus 45 cents for every dollar over $180,000
What is the tax-free threshold?
The tax-free threshold is a set amount of income on which tax does not apply. Currently, this threshold sits at $18,200. This means that the first $18,200 of your total yearly income is not subject to income tax. If you make $18,200 or under, you will receive a full tax refund for any tax you pay when you lodge your annual tax return.
Even if you make above this amount, claiming the threshold reduces the amount of tax that is withheld from you throughout the year. If you do not claim this amount, it will be refunded in your annual tax return.
Non-Australian residents are not able to access the threshold and must pay tax on everything they earn in Australia. If you’re unsure whether you are eligible to claim the tax-free threshold, you should talk to a tax lawyer.
How to claim it
Whenever you start employment at a new job your employer (payer) will give you a Tax File Number Declaration (NAT 3092) for you to complete. Every working Australian is allocated a Tax File Number (TFN), and this stays with you for your whole life. Should you apply for payments from Centrelink, you will also have to complete a tax file number declaration as government agencies are also classified as a payer by the ATO.
Question 8 of the Tax File Number Declaration asks ‘Do you want to claim the tax-free threshold from this payer?’ to which you place an ‘X’ in the Yes box. After this have 28 days to submit your Tax File Number Declaration with your tax file number to your payer in order to claim an exemption.
If your income falls below the tax-free threshold and you are under 18 years old, you can also be exempt from paying tax.
Is it compulsory to claim the tax-free threshold?
If you have more than one employer, you can opt out of claiming the tax-free threshold. The threshold is generally claimed on the job which generates you the most income. This means that in the course of the financial year, you will pay less tax.
Your secondary employer is then required to withhold tax at the higher ‘no tax-free threshold’ rate.
If however, your total income will be less than $18,200, you may then claim the tax-free threshold from each employer.
George works part-time at a cafe called ‘The Local’. He only works 2 days a week, each being for a 6-hour shift. George also works part time at a bar named ‘G’s’. He works 5 nights a week doing 7 hour shifts. George should claim the tax-free threshold for his employment at ‘G’s’ as this is where the majority of his income is generated. Further, not claiming the tax-free threshold from ‘The Local’ means he will pay less tax in the long run.
What if you are a resident for part of the year?
If you are a resident in Australia for only part of the year, the tax-free threshold that applies to you may vary. The minimum amount that will apply is $13,464, with the remaining amount dependant on the duration of your residence. You can find a detailed breakdown of this calculation on the ATO’s website.
Jackie is the Content Manager at Lawpath and manages the content team. She has a Law/Arts (Politics) degree from Macquarie University and is a solicitor in NSW. She's interested in how technology can help shape the future legal landscape.