• Tax Deductions

Tax Free Threshold in Australia; Everything You Need to Know

Tax-free threshold holds a pivotal element of the tax system in Australia. It is the amount of yearly income you can earn without being subjected to tax. Currently, it’s $18,200. This means that if your earnings are below this figure, you don’t have to pay tax. However, if your income exceeds this limit, you’ll be taxed. Also, non-residents are not typically eligible for a tax-free threshold.

The tax-free threshold in Australia serves as a cornerstone of the nation’s tax system. Its primary purpose is to alleviate the burden on low and middle-income earners. ATO exempts a portion of their income from taxation. Thereby, ensuring that individuals with lesser incomes can meet their needs without being burdened.

In this article, you’ll find every bit of information you require as an Australian resident for tax purposes.

How Does Tax-Free Threshold Works

The tax-free threshold is the baseline for assessing an individual’s taxable income. It is the minimum amount one can earn before becoming liable to pay income tax. For the financial year 2023-2024, it’s $18,200. It is going to be the same for the coming financial year as well. However, the income tax rates are different for the year 2024-2025. The changes will be applicable from July 1, 2024. Until then, the existing rates apply. So, knowing the rates for both years is important.

Earning $18,200 annually is equivalent to earning:

  • $ 350 weekly
  • $ 700 fortnightly
  • $ 1517 monthly

Australian Income Tax Rates for 2023-2024

  1. The tax rate for income below $18,200 is 0%. No tax is payable for this amount.
  2. For income above this amount up to $45,000 is 19%. This means you have to pay 19c for each dollar over $18,200.
  3. Exceeding $45,000 up to $120,000, the tax rate is 32.5%. This means you are liable to pay $5,092 plus 32.5c for each dollar over $45,000.
  4. The tax rate for income above $120,000 up to $180,000 is 37%. You are then subjected to pay $29,467 plus 37c for each dollar over $120,000.
  5. If you earn more than $180,000 annually, you have to pay 45% tax. This means that you’ll pay $51,667 plus 45c for each dollar over $180,000.
Income BracketRatePayable Tax
<$18,2000%Nil
$18,200-$45,00019%19c for each dollar over $18,200.
$45,000-$120,00032.5%$5,092 plus 32.5c for each dollar over $45,000.
$120,000-$180,00037%$29,467 plus 37c for each dollar over $120,000.
>$180,00045%$51,667 plus 45c for each dollar over $180,000.

On 27 February 2024, the government passed the changes in the rates. These changes will apply from July 1, 2024. These changes are:

1.      Bottom tax rate is reduced to 16%.

2.      32.5% rate is decreased to 30%.

3.      Threshold for a 37% tax rate is increased to $135,000.

4.      The threshold for a 45% tax rate is increased to $190,000.

Following are the rates for the coming financial year.

Australian Income Tax Rates for 2024-2025

1.      The tax rate for income below $18,200 is the same. No tax is payable for this amount.

2.      For income above this amount up to $45,000 is 16%. This means you have to pay 16c for each dollar over $18,200.

3.      Exceeding $45,000 up to $135,000, the tax rate is 30%. This means you are liable to pay $4,288 plus 30c for each dollar over $45,000.

4.      The tax rate for income above $135,000 up to $190,000 is 37%. You will then pay $31,288 plus 37c for each dollar over $120,000.

5.      If you earn more than $190,000 annually, you have to 45% tax. This means that you’ll pay $51,638 plus 45c for each dollar over $180,000.

Income BracketRatePayable Tax
<$18,2000%Nil
$18,200-$45,00016%16c for each dollar over $18,200.
$45,000-$135,00030%$4,288 plus 30c for each dollar over $45,000.
$135,000-$190,00037%$31,288 plus 37c for each dollar over $120,000.
>$190,00045%$51,638 plus 45c for each dollar over $180,000.

Claiming Tax-Free Threshold

You usually claim a tax-free threshold when you earn less than $18,200 annually. Let me explain to you how and when to claim a tax-free threshold.

How to

When you start a job, the employer gives you a Tax File Number (TFN) Declaration Form. This form is about your tax status. Question 9 asks you about whether you want to claim a tax-free threshold. Simply tick yes.

Make sure all the information you have given is correct. Incorrect information may cause problems in processing your claims. After completion, submit the form to your employer. They will use this information to calculate the amount of tax to withhold from your pay.

When to

When to claim tax-free threshold? This is the most common question that comes to everyone’s mind. Let me explain to you with examples. In this way, you’ll get a better understanding.

Example 1

You earned less than $18,200 annually but paid tax.

In this scenario, lodge a tax return. You’ll likely get back the tax you paid.

Example 2

If you have two jobs at once.

If you have more than one income at once, you should claim a tax-free threshold at one of them. usually on the one that pays you the highest. However, if your combined annual income from all sources is less than $18,000, you can claim a tax-free threshold from each payer. If your income increases later in the year, you will provide a withholding declaration to one of your employers. This will advise them to stop claiming tax-free thresholds.

Example 3

If you are an Australian resident for part of the year.

If you become an Australian resident during the income year, you will receive a part-year tax-free threshold. Part-year tax-free threshold is $13,464. The remaining $4,736 is pro-rated according to the number of months of your residency.

 Bottomline

You are now equipped with all the necessary information about the tax-free threshold. From the current threshold amount to the income tax rate, and guidelines to claim the threshold. You can now effectively manage your finances and tax obligations. Remember to stay updated on any changes.

Optimize your financial well-being by leveraging this knowledge to make informed decisions.

References:

[1] Australian Income Tax Rates SuperGuide

Suggested Reads

  • Jaxon Rylah

    Jaxon Rylah, an Australian of diverse heritage, brings a wealth of expertise to his role as an Author at Taxly.ai. With over 5 years of experience in the field, Jaxon's deep understanding of accounting principles and regulations allows him to provide...

Categories:

Tags:

Comments are closed

document.addEventListener('DOMContentLoaded', function() { const links = document.querySelectorAll('a[href^="#"]'); links.forEach(link => { link.addEventListener('click', function(e) { e.preventDefault(); const targetId = this.getAttribute('href').substring(1); const targetElement = document.getElementById(targetId); if (targetElement) { window.scrollTo({ top: targetElement.offsetTop, behavior: 'smooth' }); } }); }); });