claim the tax Free Threshold

When would you need to claim the tax free threshold? So let’s suppose that you’re starting a new job and your employer gives you a tax file declaration form to fill out. You get confused as to what information you have to put in.

This post will help you work out all nitty-gritty of the tax free threshold.

What is the tax free threshold?

The first question that anyone should ask what the hell is this the tax free threshold?
This is the amount of income you can earn without paying a single penny of taxes.

As of the 2023 tax year if you earn less than $18,200 in a year you don’t need to pay any taxes.

However, if you earn more than $18,200, you must pay tax on every dollar earned over the threshold limit. 

How can you claim the tax free threshold?

So apparently it would look too good to be true. You are earning income and you’re paying no taxes if you claim the tax-free threshold. The natural second question you might ask is how to do it.

claim the tax free threshold

You need to be mindful that if you claim a tax-free threshold, you should not earn more than $18,200 that year. However, you should not be claiming the tax-free threshold if you’re earning more than that.

So if you are starting a new job and filling out your tax file number declaration form. This is the right time to claim the tax-free threshold.

Where do you need to claim the tax free threshold?

Please refer to the guidelines provided below on how to fill out your tax file number declaration form. This is the only time you can claim the tax-free threshold.

How to fill in the Tax File Number Declaration form?

As an employee, i.e taxpayer you will just need to complete only the Section A of your tax file number declaration form. Section A comprises 11 questions.

Question 1 will ask you what your tax file number is.

Question 2-5 you have to fill in your personal information.

Question 6 is about nature of your employment. Select the options appropriate to your employment contract. That is if you are earning as an full-time, part-time, superannuation income stream, contractual or labour hire.

Usually you would either be a full-time employee a part-time employee or a casual employee.

Question 7  please tick Yes, if you are an Australian resident for tax purposes. Or otherwise no if you are a temporary or non-resident for tax purposes. Read more about your Australian tax residency status. 

Question 8 This is a technical question so basically you have to tick if you want to claim no tax-free threshold from your income for this employment. If you tick “Yes” it would mean that no tax would be withheld from your income and your income would be tax free. Alternatively if you want tax to be withheld from your income from this employer please select “No”.
This question is very important when you have two or more jobs. Please read  section below that answers what to do if you have more than one job.

Question 9-11 you’ll have to again look into your personal information and choose appropriate option you can see the description next to the options that will help you decide what you should be choosing. In most cases you will be answering “No” to question number 9 to 11.

What if you have more than one job?

So normally if you have more than one job you will have to fill in the tax file declaration form for both of the employers. And therefore it is advised that you should be super vigilent of your selection for Question no 8.

As making incorrect selection may result in you paying more taxes. Alternatively, it could be the case that you pay less taxes due to incorrect selection in Q8. Resulting you will have to bear a higher tax liability at the tax year end.

claim the tax free threshold

So choosing a Yes in Question 8 = Paying less taxes

And choosing a No in Question 8 = Paying more or the right amount of taxes

In case of two jobs, you should be choosing “No” for your primary job. The Primary job would be the one that generates more income and where you spend most of your hours. 

For your secondary job you choose “Yes” as you would be spending less hours in that job, and hence less income. 

Let us take this example.
Supposedly you have two jobs and your earning an annual $40,000 from your Employer A. As this is your primary job you need to select “No” to Q8. You income would be paid after deducting PAYG withholding tax. And your tax liability for the year would be more or less appropriate to your tax rates.

From Employment B you might be working part-time and earning roughly $16,000. It is advised to select “Yes” to Q8 as potential income is lower than the threshold limit of $18,200. Additional tax will be withhold from this income to subsidise any year end tax liability surprises.

Your average per hour pay would be higher from Employment B as it is tax free.

However, please note that at the end of financial year. Income tax would be charged on your overall income, in this case 56,000 in this case. And only tax credits you would have against this income would be coming from Employment A. This would mean that you still need to pay tax on employment B.

See below screenshots from our tool to help you see how numbers would look like

Case A – Q8 ticked “Yes” for both employment

Income from Employment A

Income from Employment B

Annual Tax liability

Approximate income tax to be paid at year-end – 8,667 – 4,367 =  $4,300 payable*

(Medicare levy is ignored for estimation purposes)

Case B: Employment B ticked “No” in question 8

Check the No tax-free threshold Option on the left side of the tool. 

As you can see that at the end of year, your total income tax contribution will be 

8,667 – ( 4,142 +3,040)  = $1,485 payable

You can see huge savings in tax liability due to making the right selection for tax withholding. You can further reduce this tax liability by claiming your occupation-appropriate tax deductions

Learn more about tax-related topics by exploring our informative articles. Check out “The Difference Between Tax Residency And Citizenship” to deepen your understanding of tax implications for residents and citizens.

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