What is the Tax-Free Threshold and when to claim it?

The Australian workforce are constantly tasked with the completion of a Tax File Number declaration at the beginning of their employment. At the completion of the form, most individuals are left pondering what is the tax-free threshold? Or do I want to claim the tax-free threshold? Throughout the following blog, we will outline everything that should be considered before you answer this on your TFN declaration form.

In short, the tax-free threshold is the amount of money that the government has declared to be tax free. In Australia this threshold is currently set at $18,200 for the 2021 and 2022 Financial Years, any income earnt above this is taxed on a progressive tax system. This allows workers to earn up to $18,200 within a financial year and not be required to pay tax. If you have tax withheld from your wages but you still don’t earn assessable income over the threshold, you will receive the money as a refund upon lodgement of your income tax return.

For reference, the $18,200 tax-free threshold equates to:

• $350 a week
• $700 a fortnight
• $1,517 a month

When should I claim the tax-free threshold?

It’s quite common for taxpayers to derive their income from a variety of sources. In addition to multiple jobs, you may receive government pensions or allowances in combination with part time jobs. The ATO recommends to only claim the tax-free threshold from one payer. In most circumstances, it’s best to claim this from the employer who pays the highest wage or salary. This means the second payer is required to withhold tax at the no tax free threshold rate, reducing the likelihood of having a tax debt at the end of the financial year.

What happens if you claim the tax-free threshold on 2 Jobs

Contrary to popular belief, it isn’t illegal to claim the tax-free threshold on 2 jobs but be warned because you may incur a tax debt at the end of the year. Essentially, claiming the tax-free threshold on multiple jobs could mean your employers don’t withhold enough tax out of your wages to cover the tax at the end of the financial year. This happens due to each employer withholding tax on the amount of wages, salary, and allowances they are paying you. Unless notified, employers have no understanding of the amount you receive and have withheld from other sources; meaning they will only withhold tax on income earnt from them.

An example of a situation that is likely to occur, could be; Two employers pay you $18,000 each throughout the financial year without withholding any tax, or withholding very little from your wages because they are under the impression you are under the threshold. You will be required to pay tax on the wages that exceed the threshold at the end of the financial year.

How to claim the tax-free threshold?

As outlined at the beginning of this article, the way to claim the tax-free threshold is on your TFN declaration form at the beginning of your employment.

If you are worried you’ve made a mistake on this, you can enquire with your employer about increasing your withholding amounts. This is known as an upwards variation.

Further to this, you can use the ATO income tax calculator to estimate your tax on wages and work out whether you may need to vary your wages upwards to avoid a hefty tax bill.

Do I want to claim the tax-free threshold?

Dependent on the person there can be many benefits, tax traps, and scenarios where you should be conscious of the tax-free threshold. Below we will cover a couple of key scenarios which a person should consider when deciding on whether to claim the tax-free threshold.

If you earned under $18,200 combined from all your income sources and didn’t claim the tax-free threshold on your main source of income.

Your employers will withhold tax from wages at the higher no tax-free threshold rate but any income tax withheld will be refunded to you after lodgement of your income tax return. This will be mean less money throughout the year and more tax then if you had claimed the tax-free threshold. Many intentionally do this as a forced form of saving as traditionally individuals receive high refunds.

If you earned under $18,200 combined from all your income sources and did claim the tax-free threshold on your main source of income.

The individual will not pay tax for the first $18,200 on your main source of employment you elected to claim the tax-free threshold under. Regardless of any income tax withheld, if your total income for the year is below $18,200 you will be refunded all the withheld after lodgement of your income tax return.

If you earned over $18,200 combined from all your income sources and didn’t claim the tax-free threshold on your main source of income.

Not claiming the tax-free threshold on any of your income sources means you will have tax withheld from your wages at the no tax-free threshold rate. This once again means you will have less money throughout the year but in most cases the tax you have withheld is at a much higher rate than required and should cover any tax liability at the end of the financial year.

If you earned over $18,200 combined from all your income sources and did claim the tax-free threshold on your main source of income.

The individual will not pay tax for the first $18,200 on your main source of employment that you elected to claim the tax-free threshold under, following this you will pay a portion of tax on every dollar earnt. The rate of tax will depend on the progressive tax and the tax bracket you fall within at the time of payment. Not ticking the tax-free threshold on other employment will lead to having tax withheld at a higher rate. As per above, this is the ATO’s recommended method.

Should you require any additional assistance please don’t hesitate to contact us.

Other Individual Tax Information & Articles:

• April 2023: No more Low and Middle-Income Tax Offset (LMITO) to lower tax bills or increase tax refunds.