What Happens if You Don’t Claim the Tax-Free Threshold?

What Happens if You Don’t Claim the Tax-Free Threshold?

Woman reviewing employment documents and pointing at the tax-free threshold section

If you live in Australia, it is important to understand the tax-free threshold to get the most out of your tax return.

In this article, our tax refund specialists have covered what the tax-free threshold is, who is eligible for the tax-free threshold, and how to claim the tax-free threshold so you can enter the tax season with confidence.

Key Takeaways

  • What Happens if You Don’t Claim: This results in higher upfront income tax but potentially larger year-end refunds.
  • Tax-Free Threshold: The first $18,200 earned yearly in Australia is tax-free.
  • Eligibility: All Australian residents earning taxable income qualify.
  • Claiming Process: Complete the ‘Tax File Number Declaration’ form.
  • Multiple Jobs: Claim from the highest paying job and inform others.
  • Below $18,200 Earnings: Full tax amount is typically refundable.
  • PAYG Tax: Withholding variation can reduce tax per paycheck.
  • Savings Strategy: Not claiming forces higher upfront tax payments, leading to larger refunds.
  • New Residents: Eligible for an adjusted tax-free threshold.

What Happens If I Don’t Claim the Tax-Free Threshold?

Infographic showing examples of what happens if too much tax is withheld and too little tax is withheld

If you you don’t claim the tax-free threshold, you’ll pay a higher rate of income tax but will likely have a smaller tax bill or a larger refund at the end of the tax year.

While the Australian Taxation Office will likely refund you for the overpaid taxes, you will still end up paying more taxes up front.

What Is the Tax-Free Threshold?

For Australian residents, the first $18,200 earned each year is tax free. The Australian Taxation Office (ATO) states you can earn up to $18,200 each year without needing to pay tax on it. This is the tax-free threshold.

Australian Resident Tax Rates 2023-2024

Taxable Income Tax on This Income
0 – $18,200 Nil
$18,201 – $45,000 19c for each $1 over $18,200
$45,001 – $120,000 $5,092 plus 32.5c for each $1 over $45,000
$120,001 – $180,000 $29,467 plus 37c for each $1 over $120,000
$180,001 and over $51,667 plus 45c for each $1 over $180,000

Source: ATO 2024

This sounds straightforward but there are various factors to consider, such as receiving income from other sources or working more than one job.

Read on to learn more about the tax-free threshold and how it affects your income tax.

Who Is Eligible for the Tax-Free Threshold?

To be eligible for the tax-free threshold, you must be an Australian resident. All Australian residents who earn taxable income are eligible to claim the tax-free threshold.

If you are only an Australian resident for part of the year, you may still qualify for an adjusted tax-free threshold.

To confirm your residency, you can take the Residency Test on the Australian Taxation Office’s website.

What Qualifies As Taxable Income in Australia?

Taxable income typically refers to your wages from a single job. However, many people hold more than one job or earn income from several sources. It is important to declare all taxable income on your return.

The Australian Taxation Office lists the following as taxable income:

  • Super pensions and annuities
  • Employment income
  • Government allowances or payments
  • Business incomes
  • Trust incomes
  • Crowdfunding
  • Investment income (this could be from interest, shares, dividends, capital gains tax, property, etc.)
  • Overseas income (foreign pensions or other earned income from overseas)
  • Incomes earned from insurance payouts or compensation
  • The sharing economy and tax
  • Certain personal services income

Some forms of income are exempt, such as certain government payments. You can verify tax-exempt income on the ATO website or work with a tax professional.

If all forms of taxable income fall under the threshold of $18,200, then you likely will not owe tax for that financial year. However, you must still lodge a tax return and declare any claimable expenses and earnings.

In some cases, you may qualify for exemption from lodging a tax return. Check the “Do I Need to Lodge” tool on the Australian Taxation Office’s website. For individuals who are exempt from lodging a tax return, they are required to submit a Non-Lodgment Advice.

Infographic showing an icon with tax documents and an accountant ticking something on a page

How To Claim the Tax-Free Threshold

Claiming the tax-free threshold is normally straightforward. To claim the tax-free threshold, you simply complete the ‘Tax File Number Declaration’ form when receiving a new Centrelink payment or starting a new job.

For the “Do you want to claim the tax-free threshold from this employer” question, you simply have to answer “Yes”.

It’s important to be aware that your employer likely will not apply the tax-free threshold to your earnings. As the ATO states, you have to actively claim the tax-free threshold when you apply for a Centrelink payment or begin a new job. If you fail to claim the tax-free threshold, PAYG tax will be automatically calculated regardless of your income.

During your employment, you are allowed to make changes to details of your tax-free threshold by filling out a Withholding Declaration for your employer or employers. Be aware of applicable time frames if you decide to make changes.

FAQs

Can I Still Claim the Tax-Free Threshold If I Have Two Jobs?

You can still be eligible for the tax-free threshold even if you have multiple jobs. The standard practice is claiming the tax-free threshold on a main job where you earn the most income. If you have several jobs, the ATO recommends claiming the tax-free threshold from the highest paying position.

If your total income during the financial year is $18,200 or less from all payers, you can claim the tax-free threshold from each employee. If your income exceeds $18,200 you need to complete a withholding declaration form. Present this form to your employers to notify them you are not claiming the tax-free threshold.

If you do not notify your employers that you are not claiming the tax-free threshold, you may undercalculate your taxes and end up owing more when the financial year is over.

Do I Get All My Tax Back If I Earn Below the $18200 Threshold?

Generally, if you earn below the tax-free threshold of $18,200, you are eligible to get your full tax amount back. However, it is important to be aware of any additional taxes or levies that impact the amount.

The easiest way to ensure compliance and maximise your return is by working with a professional tax accountant. They can make sure you are lodging an accurate return, claiming any deductions you are eligible for, and getting the most out of your tax return.

How Does the Tax-Free Threshold Apply to PAYG Tax?

You can opt for the PAYG (Pay as you go) withholding variation if you want to lower the amount of tax that gets taken out of each paycheck.

Here is a breakdown of the pay-as-you-go level of the tax-free threshold:

  • If you’re paid weekly, you are responsible for paying tax on any earnings above $350
  • If you’re paid fortnightly, you are responsible for paying tax on any earnings above $700
  • If you’re paid monthly, you are responsible for paying tax on any earnings above $1,517

You can also use a tax refund calculator to estimate how much tax you need to pay on your annual income.

Are There Benefits of Not Claiming the Tax-Free Threshold?

People who struggle with saving and budgeting may opt to not claim the tax-free threshold. This is referred to as the ‘tax-free threshold savings strategy’.

This strategy means you pay more taxes up front out of your income and get a bigger return later when you are reimbursed. This forced savings method isn’t for everyone, but it is important to be aware of it.

Can I Claim the Tax-Free Threshold Even If I Just Moved to Australia?

Yes, even if you were only an Australian resident for part of the year, you may still be eligible for an adjusted tax-free threshold of:

  • A flat amount of $13,464
  • Up to an additional $4,736 (this amount is calculated based on the number of months from when you became an Australian Resident to June 30, which marks the end of the Australian tax year)

If you have questions about residency and the tax-free threshold, you can contact the ATO or a professional tax specialist.

Need Help with Your Tax Return in Australia?

If you have questions about the tax-free threshold in Australia or are feeling overwhelmed about your tax return, our accountants at My Tax Refund Today can help.

We help people get their tax refunds instantly without the processing wait. We handle all the requirements, exemptions, and deductions so you can stop stressing over tax season. Our CPA-qualified accountants, tax refund specialists, and tax agents will make sure you get the most out of your tax return.

If you have questions about the tax-free threshold or want to book an appointment, contact us to speak with one of our helpful, knowledgeable tax specialists.

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