A higher tax-free threshold has changed Australian tax rates for the 2012-2013 financial year
The tax-free threshold marks the amount of your income that is exempted from tax. The lowest tax bracket has a tax rate of 0%. The tax-free threshold marks the top of this bracket. Australian residents don’t have to pay any tax at all on the income below this threshold. Taxation only starts once your income crosses the threshold and enters the second bracket.
The Australian tax-free threshold used to be $6,000. But starting with the 2012-2013 financial year, it more than tripled to $18,200. Now the first $18,200 of your income is exempt from tax.
The tax-free threshold isn’t just something you can forget about until tax time next year because it determines how much tax is withheld from your paychecks all year long!
Claiming the Australian tax-free threshold
In order to take advantage of the tax-free threshold, you must claim it through one of your payers. When you start a new job or start receiving government payments through Centrelink, for example, you must decide whether to claim the tax-free threshold through that payer. If you want to, you will have to mark the “Yes” box next to question 8 “Do you want to claim the tax-free threshold?” on your Tax file number declaration (NAT 3092).
The payer you claim it from will withhold less of your wages for taxes. For 2011-2012 the tax-free threshold translated into $115 per week. That’s an extra $230 in your paycheck every fortnight. With the latest changes to the tax rates, the tax-free threshold for 2012-2013 will keep $700 in your paycheck every fortnight. That’s quite a bit of money!
If you have multiple payers, you can only claim the tax-free threshold from one of them. Otherwise, if you claim it from multiple payers, not enough money will be withheld from your taxes and you’ll be saddled with a massive tax bill from the ATO when you lodge your return. Generally speaking, it’s a good idea to claim the tax-free threshold from the payer who pays you the most money. While that employer will withhold at a much lower rate, it also means that your other employers will withhold tax at a higher rate.
How residency affects the Australian tax-free threshold 2012
The tax-free threshold only applies to Australian residents. Nonresidents who have to lodge taxes in Australia, such as some working holidaymakers, do not get the benefit of a tax-free threshold and are thus taxed on all of their income.
If your residency changes halfway through the financial year – for example if you enter or leave Australia – you still get a tax-free threshold, but it will be less than the one awarded to full-time residents.
The tax-free threshold you can claim depends on the number of weeks out of the financial year that you were an Australian resident. The threshold amounts to $350 a week, which means that if you were an Australian resident for 10 weeks your threshold will be 10 x $350 = $3,500. If you were a resident for ten weeks during the 2011-2012 financial year, your tax-free threshold will be 10 x $115 = $1,150.
Photo via Alan O’Rourke on Flickr.