The tax free threshold is a cap on how much someone can earn during the financial year before paying tax. In Australia, the first $18,200 you earn between 1 July and 30 June the next year is tax-free, regardless of which employer you earned it from.
From there, you will fall into a tax bracket and will pay a higher percentage of tax as you move into higher brackets.
Do I want to claim the tax free threshold?
The short answer is yes. By claiming the tax free threshold, you do not pay tax on the first $18,200 you earn during the financial year. By ticking “no” on your Tax Declaration Form, your income will be taxed at a higher rate, leaving you with less money in your pocket each pay. However, at tax time, your income tax will be calculated based on your total earnings, so you will receive back the extra tax you paid throughout the year.
What about claiming the threshold for a second job?
Whether you have two jobs at once or change jobs part of the way through the year, you should NOT claim the tax free threshold on the second job. Essentially, you could be not paying tax on $36,400 (which you should be paying) and will likely owe the ATO money at tax time. Remember, if you claim the tax free threshold on a second job, your employer has no way of knowing if you’ve already claimed it, or how much money you’ve earned, or tax you’ve paid.
Once you start earning over the tax free threshold, you pay a set percentage of tax based on the tax bracket you fall into. This is why it’s important to only claim it once, since the income of two jobs could put you into a higher tax bracket. And the higher the tax bracket, the higher your tax payable at tax time.
Example:
Jimmy works part-time as a café barista. He also works casually as a server for an event catering business and claims the tax free threshold on both.
At the café, Jimmy earns $34,000 for the entire year. As a server, he received $20,000.
If he claimed the tax free threshold on both:
| Café | Server | Total |
|---|---|---|
| Income: $34,000 | Income: $20,000 | Income: $54,000 |
| Tax Paid: $3,002 | Tax Paid: $342 | Tax Paid: $3,344 |
| How much Jimmy now owes: $4,673 more |
How does the tax free threshold work if you changed jobs part way through the year?
When you change jobs during the financial year, you probably claimed the tax free threshold on the first job you held, and didn’t claim the threshold on the second job. Although you would have paid more tax and received less cash in hand from the second job, you don’t want to continue not claiming the threshold for your new job in the next financial year.
So, at the beginning of the next financial year, check in with your HR team and ask if they can help you fill out another Tax Declaration Form and then claim the tax free threshold.
How can you avoid a tax bill?
If you have more than 1 employer during the financial year and want to avoid a tax debt with the ATO, you should be sure to only claim the tax free threshold once during the entire financial year (1 July – 30 June).
You can also claim any work-related tax deductions to reduce the amount of tax you are required to pay. Our accountants can help you by suggesting additional deductions based on your occupation, all you need to do is login to your Etax account, enter your information, and we’ll do the rest.
