What is a tax-free threshold?
The tax-free threshold refers to the income amount you earn before paying tax. Most Australian residents are liable to claim a tax-free threshold on the first $18,200 of the income they earn in the income year. By claiming the tax-free threshold, you can reduce the amount of tax withheld from your income. The tax-free threshold is equivalent to earning:
- $350 a week
- $700 a fortnight
- $1,517 a month.
When to claim the tax-free threshold?
If you have multiple payers at the same time, you only claim the tax-free threshold from one payer. Generally, you apply to claim the tax-free threshold from the payer who pays you the highest salary or wage. You may get income from 2 or more payers at the same time, if you:
- Have a second job or more than 2 jobs
- Have a regular part-time job and also get a taxable pension or government allowance
- Are working under an ABN as a sole trader, contractor, or other business structure.
By opting for Melbourne accounting solutions, you can be sure when to claim the tax-free threshold.
Second job or payer
If you have multiple payers and intend to earn more than $18,200 from all sources, you need to advise your other payers to withhold tax from your income at a higher rate. This is the ‘no tax-free threshold’ rate. You should complete and file a PAYG withholding variation application. You need to request in writing and send it as an email request, an online form, or a paper form. Doing this can minimise the chance of you having a tax debt at the end of the income year.
Change of job during the income year
If you change jobs during the income year and your previous payer stops paying you, then you will not be able to claim the tax-free threshold from them. You can claim the tax-free threshold from your new payer even if you have claimed it from your previous payer. To choose whether to claim the tax-free threshold from your new employer, you need to complete a tax file number (TFN) declaration. Your employer will check how much tax to withhold from their payments to you. The ATO will check your total tax payable at the end of the income year when you file your tax return.
How to claim?
You may be receiving income from one or more payers, such as an employer, government agency or work you do under an Australian Business Number. You are eligible to claim the tax-free threshold each income year if you are an Australian resident for tax purposes. You can claim or not claim the tax-free threshold on the tax file number declaration you provide to your payer. If you choose to do so:
- You won’t pay tax if your income is under $18,200
- Your payer will withhold tax when you earn more than $18,200.
You need to understand what you should do if you have more than one job or change jobs during the income year.
If you are an Australian for part of the year
If you are an Australian resident for tax purposes for part of the income year, you will get a part-year tax-free threshold. The part-year tax-free threshold has 2 components:
- A flat amount of $13,464
- An additional amount up to $4,736 pro-rated – the ATO works on the number of months you were in Australia during the income year, including the month you arrived.
If you are a non-resident for the full income year, you won’t be eligible to claim the tax-free threshold. This means you pay tax on every dollar of income you make in Australia.
What if too much tax is withheld?
If your income is above $18,200 and too much tax was withheld in the income year, you are allowed to apply to reduce the tax amount withheld from your payments. You’ll need to complete and file a PAYG withholding variation application. You need to request in writing and send it as an email request, a paper, or an online form. When the ATO receives your application, the ATO will calculate the variation amount and offer your payers new instructions for withholding your tax. You should only apply for this variation if you know your income amounts are accurate and the standard tax withholding is causing you a disadvantage.
Conclusion
If you want to claim the tax-free threshold from your payer, you need to understand your requirements. For more information, get in touch with Reliable Melbourne Accountants.
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