Claiming the Tax-Free Threshold Correctly
Claiming the Tax-Free Threshold: Your Guide to Avoiding a Tax Debt
As an Australian resident for tax purposes, you have the opportunity to keep more of your income by claiming the tax-free threshold. However, if you don’t manage this correctly, you may find yourself facing an unexpected tax debt. Let’s dive into; what the tax-free threshold is, how to claim it, and how to ensure you’re on track to avoid a tax debt when you lodge your return.
What is the Tax-Free Threshold?
The tax-free threshold is the amount of income you can earn each year without paying income tax. In Australia, this threshold is set at $18,200. This means if you earn less than this amount in a financial year, you won’t have to pay tax on your income. However, once your income exceeds $18,200, you’ll be taxed on the excess.
Claiming this threshold is essential for anyone who has multiple jobs, side gigs, or receives government payments. Getting it right ensures you avoid a tax debt when you submit your tax return at the end of the financial year.
Why You Should Only Claim the Tax-Free Threshold Once
The Australian Tax Office (ATO) advises that you should claim the tax-free threshold from your main source of income. That would typically be the job or gig that pays you the most. Why? Suppose you claim the threshold from multiple sources, such as multiple employers or both an employer and a side business. It may turn out that not enough tax will be withheld throughout the year. This can lead to a tax bill when you file your return.
Quick Example:
If you work two jobs and claim the tax-free threshold from both, you might have insufficient tax withheld from each job. When the ATO calculates your total annual income, it will tax the amount above $18,200. If you haven’t had enough withheld, you’ll end up owing money.
How to Claim the Tax-Free Threshold Correctly
When you start a new job or gig, your employer will give you a Withholding Declaration form to complete. You can also access this through the ATO website. The form asks whether you wish to claim the tax-free threshold from this payer. Here’s how to make sure you’re claiming it correctly:
- Identify Your Main Payer – This is usually the job or source that provides the most income.
- Answer “Yes” for the Main Payer – Only claim the tax-free threshold from your main payer to ensure that sufficient tax is withheld.
- Answer “No” for Other Income Sources – For any other jobs, side gigs, or government payments, make sure you don’t claim the threshold again. More tax will be withheld, but this ensures you won’t have a tax debt later.
What Happens if You Change Jobs?
If you switch jobs during the year, you can transfer your tax-free threshold to your new employer. Your previous employer automatically stops claiming the threshold for you when you leave, so you can claim it from your new main job. If you start earning more from another source later in the year, you can also update your threshold claims through your myGov account, under ATO online services.
Tips for Managing Multiple Income Sources
Managing multiple income streams, like a side hustle, can complicate your tax situation. Here are some tips to help:
- Track Your Income – Keep records of how much you earn from all sources. This will help you manage your tax payments.
- Set Money Aside for Tax – If you’re a sole trader or earn extra income from a side gig, set aside a percentage of your earnings for tax. The ATO advises setting aside around 25-30% of your income to cover potential tax liabilities.
- Consider PAYG Instalments – If your income fluctuates or grows significantly, the ATO may require you to make Pay As You Go (PAYG) instalments. These are regular payments toward your expected tax bill, helping you avoid a large amount due at tax time.
The Consequences of Overclaiming the Tax-Free Threshold
If you mistakenly claim the tax-free threshold from more than one payer, it’s likely you’ll end up with a tax bill. When you file your tax return, the ATO will add up all your income and compare it to the amount of tax withheld. If not enough tax has been deducted, you’ll need to pay the shortfall.
Example:
Sarah works two part-time jobs. She claimed the tax-free threshold from both employers. When she lodged her tax return, she found she owed $1,200 to the ATO because neither employer withheld enough tax. This is a common pitfall for people with multiple jobs, but it can easily be avoided by only claiming the tax-free threshold from the main source of income.
How to Change Your Tax-Free Threshold Claim
If your financial situation changes—such as starting a new job or earning more from your side business—you can easily update your tax-free threshold claim. The easiest way to do this is online through myGov:
- Sign in to your myGov account.
- Select ATO Online Services.
- Under the Employment menu, you can update your details with your current employer or set up details for a new employer.
Updating your tax-free threshold claim ensures that your tax is managed correctly as your income changes throughout the year.
Don’t Forget About Government Payments
If you receive government payments like JobSeeker, these payments are treated like income from an employer. You should not claim the tax-free threshold for these payments if you’re already claiming it from a job. Doing so could result in underpayment of tax and a subsequent debt when you lodge your tax return.
Avoiding a Tax Debt
The key to avoiding a tax debt is making sure the right amount of tax is withheld from your income throughout the year. By following these guidelines, you’ll reduce the risk of owing the ATO money at tax time:
- Claim the tax-free threshold from your main payer only.
- Don’t claim it from multiple jobs, gigs, or government payments.
- Monitor your total income and adjust your claims as needed.
Statistics and Expert Advice
According to the ATO, many Australians fall into the trap of overclaiming the tax-free threshold. It’s estimated that 2.5 million Australians have a second job or side gig, with many potentially mismanaging their tax-free threshold claims.
Paul Drum, the Head of Policy at CPA Australia, advises: “It’s essential to manage your tax affairs correctly. Incorrectly claiming the tax-free threshold can lead to tax debts and penalties.”
Conclusion: Get the Tax-Free Threshold Right
The tax-free threshold offers significant benefits, but only when managed correctly. Claiming it from the right source ensures you get the most from your pay without facing a surprise tax bill. If you’re unsure, seeking advice from a tax professional is always a smart move.
By understanding the rules and monitoring your income, you can confidently claim the tax-free threshold and avoid unexpected debts. Stay on top of your tax obligations to keep your finances in order and enjoy the benefits of the tax-free threshold.
This comprehensive guide should help you manage your tax-free threshold, avoid tax debts, and maximise your take-home pay. Always consult with a professional if your circumstances change or if you’re unsure how to manage your tax obligations. Navigate the world of taxes with confidence and ensure you make the most of your hard-earned money.