Understanding the tax-free threshold: what you need to know to keep more of your money!

It’s always best to seek professional advice or refer to the official Australian Taxation Office (ATO) website for the most up-to-date and accurate information regarding tax regulations. Keep reading this Legal Kitz blog to understand more about what the tax-free threshold is.

What is the tax-free threshold?

The ATO states that the tax-free threshold meaning is a set amount of income an individual can earn before being required to pay any income tax. In Australia, for the 2021-2022 financial year, the tax-free threshold is $18,200. Meaning you are not required to pay any income tax if your taxable income is equal to or less than this.

The tax-free threshold applies to Australian residents for tax purposes. If you are not a resident, you are not eligible for the tax-free threshold and are subject to different tax rates.

Depending on the amount of taxable income, any income earned over the tax-free threshold is taxed at progressive rates ranging from 19% to 45%. Some types of income, such as government benefits and certain allowances, may be exempt from tax even if they exceed the tax-free threshold.

Can I claim tax free threshold on my new job?

If you have started a new job, you may be wondering what the pros and cons of claiming tax-free threshold are. The answer depends on your total income for the financial year. The Tax File Number (TFN) Declaration Form issued by the Australian Taxation Office (ATO) states that you can claim the tax-free threshold if you are an Australian resident for tax purposes and earn less than $18,200 in a financial year. If you meet the eligibility criteria, you can declare the tax-free threshold on your new job by ticking the relevant box in the form. However, if you have more than one job, you should only claim the tax-free threshold on one of your jobs.

Do I say yes or no to claim the tax-free threshold?

Whether you answer yes or no the tax-free threshold on your withholding declaration depends on your individual circumstances. If an individual expects to earn less than the tax-free threshold in a financial year, then they should select “yes” to claim the tax-free threshold on their withholding declaration. This will ensure that the correct amount of tax is withheld from their pay.

However, if an individual expects to earn more than the tax-free threshold, then they should select “no” on their withholding declaration. This is because if an individual selects “yes” when they are not entitled to the tax-free threshold, they may end up owing additional tax at the end of the financial year. To understand the no tax-free threshold meaning you can seek professional advice or refer to the ATO website for further information.

It is important for individuals to consider their expected income for the financial year when deciding whether to claim the tax-free threshold or not.

Should everyone claim the tax free threshold?

According to the Australian Taxation Office (ATO), if you earn over a certain amount of income during a financial year, you are required to pay tax. However, if you earn less than the tax-free threshold, you may be eligible for a refund of any tax that has been withheld from your income.

Whether or not everyone should claim the tax-free threshold depends on their individual circumstances. If you expect to earn less than the tax-free threshold during the financial year, it may be advantageous to claim the threshold and receive a refund of any tax withheld from your income. However, if you expect to earn above the tax-free threshold, you should not claim the tax-free threshold as it will result in you owing more tax at the end of the financial year.

Ultimately, it is important to understand your individual tax situation and seek advice from a tax professional or the ATO if you are unsure about the tax-free threshold meaning.

What happens if I say no to claiming the tax free threshold?

If an individual does not claim the tax-free threshold on their withholding declaration, their employer will withhold tax from their pay at a higher rate. This is because the tax-free threshold is built into the tax rates and is applied to reduce the amount of tax withheld from an individual’s pay.

Without claiming the tax-free threshold, an individual may end up paying more tax than they are required to throughout the year, resulting in a lower take-home pay. However, at the end of the financial year, the individual will be entitled to a refund of any overpaid tax.

It’s important to note that if an individual is entitled to claim the tax-free threshold and fails to do so, they may face a tax bill at the end of the financial year if they have underpaid their tax. Therefore, it’s essential to ensure that the correct amount of tax is withheld from their pay by accurately completing their withholding declaration, including claiming the tax-free threshold if eligible.

Legal advice

Correctly abiding by the tax-free threshold and understanding the tax-free threshold meaning can be a daunting experience for any new employee about to enter the workforce, or even if you’re just changing your circumstances. However, you can always contact Legal Kitz to assist you. To arrange a FREE 30 minute consultation with one of our highly experienced solicitors contact us at info@legalkitz.com.au or 1300 988 954. Additionally, you can also check out our sister company – Business Kitz’s Subscriptions to access our full range of legal, commercial and employment document templates to begin your business with a solid foundation that ensures compliance.