Should I Claim the Tax-Free Threshold?

Written by:

Kellie Amos


October 26, 2020

Last updated

August 12, 2022

Reading time

5 minutes

Kellie Amos

Kellie Amos is a contributing writer for Oiyo. She has a Bachelor of Business in Marketing and a Bachelor of Creative Industries in Creative & Professional Writing from the Queensland University of Technology. Kellie has previously produced content for a range of finance companies, entertainment publications, and fintechs.

If you’re earning an income in Australia, the tax-free threshold will have a big impact on your take home pay at the end of the year. Get to know the basics, in this helpful guide from Oiyo.

What is the tax-free threshold?

Australia has a progressive tax system, this means that the more you earn – the more tax you’re required to pay. Naturally, income tax rates will vary between residents, children, foreign residents, and holiday workers. There are also (of course) some factors that can influence how much you’ll have to pay come tax time, and the tax-free threshold is a big one.

Basically, the tax-free threshold reduces how much tax is withheld from your pay each year. MoneySmart defines the tax-free threshold as:

“The level of annual income, as set by the Australian Taxation Office (ATO), on which you do not have to pay income tax.”

How to claim the tax-free threshold

The current tax-free threshold set by the ATO is $18,200. So, if you’re considered an ‘Australian resident’ for tax purposes, the first $18,200 of your yearly income doesn’t have to be taxed.

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In a year, the $18,200 tax-free threshold works out to be:

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

When you start a new job, you’ll have to fill out a Tax File Number Declaration Form for your employer. On this form, you’ll be able to opt in for the tax-free threshold by answering ‘Yes’ to the question ‘Do you want to claim the tax-free threshold from this payer?’

Centrelink is also considered a ‘payer’ by the ATO and will also need you to complete this form if you apply for their payments.

What if you have more than one source of income?

Generally, if you have more than one source of income, the ATO will only allow you to claim the tax-free threshold from the highest paying source. Other streams of income will have to withhold tax from your pay at a higher rate. The ‘no tax-free threshold’ rate can change, depending on your circumstances. You can apply to change how much tax is withheld from your other sources of income if:

Should you claim it?

When it comes to claiming the tax-free threshold, there aren’t really any disadvantages worth noting. Whether or not you claim the threshold will affect the level of PAYG tax that your employer will take out of your regular pay. Tax-free income for most people, will always be a bonus.

Although you can claim further deductions in your tax return, the tax-free threshold is a simple way of ensuring you pay less tax come the end of the financial year.

As a result, virtually everyone has something to gain from the tax-free threshold, regardless of their income size.

How tax applies to your super

While we’ve got you here, let’s quickly touch on tax and super. The tax-free threshold is not inclusive of your superannuation payments. How your super will be taxed depends on your age, contributions, and other factors. As a result, it’s super (see what we did there?) important you understand how different tax implications may affect your nest egg.

Your super is usually taxed at a lower rate than your personal income. The money you invest into your superannuation fund can be taxed at four different points:

  • Super contributions: when the money goes in
  • Investment earnings: while it’s in your fund
  • Super benefits: when you withdraw it
  • Super death benefits: when you die

Ultimately, the ATO will treat your superannuation savings very differently depending on which point it’s at. Since everyone’s situation is so different, it’s always a good idea to get advice about your tax. Refer to the Australian Taxation Office (ATO) for more info and get in touch with a financial adviser if you need more clarification.

More on superannuation

Discover our latest articles on all things super & tax!

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Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.


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