A Simple Guide to the Australian Tax Free Threshold
- 21 hours ago
- 9 min read
The Australian tax-free threshold is the amount of income you can earn each financial year before you are required to start paying income tax. For Australian residents for tax purposes, this amount is a critical part of the personal tax system, effectively creating a zero tax rate on the first portion of earnings.
Based on our experience at Baron Tax & Accounting, a common point of confusion for clients in Brisbane is how the threshold applies when they start their first job or take on a second one. Getting the Tax File Number declaration right from the beginning is the key to avoiding an unexpected tax bill. A simple error, such as claiming the threshold from two employers, can lead to significant under-payment of tax over the year.
Understanding the Tax Free Threshold
The tax-free threshold is a cornerstone of Australia's personal income tax system, designed to ensure that individuals on lower incomes can keep every dollar they earn up to a certain point.
If you are an Australian resident for tax purposes, the first $18,200 you earn in the 2025–26 Financial Year is not subject to income tax.
Australia's Progressive Tax System
Australia uses a progressive tax system, meaning the rate of tax you pay increases as your income rises. The tax-free threshold represents the 0% tax bracket, which is the first step in this tiered system. This structure is designed to be fairer than a flat tax system, where everyone pays the same percentage regardless of their income.
A common misconception is that earning enough to enter a higher tax bracket means your entire salary is taxed at that higher rate. This is incorrect. Only the portion of your income that falls within that specific higher bracket is taxed at the higher rate.
How It Works in Practice
The tax-free threshold is not a lump-sum payment or a refund. It is integrated into the Pay As You Go (PAYG) withholding system. When you commence employment, you complete a Tax File Number (TFN) declaration form, which includes a question asking if you want to claim the tax-free threshold.
By answering ‘Yes’, you instruct your employer not to withhold tax from the first $18,200 of your annual income. This results in higher net pay in each pay cycle. If your total income for the financial year remains below $18,200, you will generally have no income tax liability.
How the Tax-Free Threshold Applies
This table illustrates how the threshold affects tax calculations at different income levels for an Australian resident in the 2025–26 Financial Year.
Annual Income | Tax-Free Portion | Taxable Portion |
|---|---|---|
$15,000 | $15,000 | $0 |
$18,200 | $18,200 | $0 |
$30,000 | $18,200 | $11,800 |
$60,000 | $18,200 | $41,800 |
$150,000 | $18,200 | $131,800 |
Regardless of total earnings, the first $18,200 is shielded from tax for eligible individuals, which directly reduces the final tax payable.
Who Is Eligible to Claim the Threshold
Eligibility for the full $18,200 tax-free threshold depends entirely on your residency status for tax purposes, as determined by the Australian Taxation Office (ATO).
Only individuals classified as an Australian resident for tax purposes for the full financial year are entitled to claim the full threshold.
Defining an Australian Resident for Tax Purposes
Tax residency is different from residency for immigration purposes. The ATO primarily uses the resides test to determine tax residency. This test assesses your overall circumstances to see if you live in Australia in a regular and habitual manner. Factors include:
Physical presence in Australia
Intention and purpose
Family and business ties
Maintenance of a home
If the resides test is inconclusive, other statutory tests may apply:
The Domicile Test: If your permanent home is in Australia, you are generally considered a resident.
The 183-Day Rule: If you are physically present in Australia for more than half the financial year, you may be deemed a resident, unless your usual place of abode is overseas and you have no intention to reside in Australia.
The Commonwealth Superannuation Test: This applies specifically to Australian Government employees working overseas.
For most people living and working in a city like Brisbane, the resides test is sufficient to confirm their status as a tax resident.
Rules for Non-Residents and Working Holiday Makers
Individuals who are not Australian residents for tax purposes are subject to different rules.
Non-residents: Generally, non-residents are not entitled to the tax-free threshold. They are taxed on their Australian-sourced income from the first dollar earned.
Working Holiday Makers: Individuals on a subclass 417 or 462 visa are taxed at a rate of 15% on the first $45,000 of income earned, and therefore do not benefit from the standard $18,200 tax-free threshold.
Part-Year Residency
If you become an Australian resident or cease to be one part-way through a financial year, your tax-free threshold is adjusted on a pro-rata basis. The ATO calculates a specific part-year threshold based on the number of months you were a resident. This calculation includes a base amount of $13,464 plus an additional amount for each month of residency, which can sometimes result in a more favourable outcome than a simple monthly apportionment. In these situations, your eligibility for other offsets, like the low income tax offset, may also be affected.
How To Claim The Tax Free Threshold
Claiming the tax-free threshold is a straightforward but essential step when starting a new job. The process is managed through the Tax File Number (TFN) declaration form.
On this form, you will be asked: 'Do you want to claim the tax-free threshold from this payer?'. For an individual with one job, the correct answer is 'Yes'.
The TFN Declaration Form
This form provides your employer with the necessary information to correctly calculate the tax to withhold from your pay under the PAYG system. By selecting ‘Yes’, you authorise your employer to apply the threshold, meaning no tax is withheld on the first $18,200 of your annual earnings. This directly increases your net take-home pay.
Today, this form is often completed online through myGov linked to ATO online services or via an employer’s payroll system. For more information, see our guide on how to file taxes in Australia.
Important Note: A TFN declaration must be completed for each new employer. If you fail to provide one, your employer is required by law to withhold tax at the highest marginal rate until the form is submitted.
A Brisbane-Relevant Example
Chloe, a recent university graduate, starts her first full-time role at a design firm in Brisbane with an annual salary of $65,000. During her onboarding, she completes a TFN declaration.
Instruction: Chloe ticks 'Yes' to the threshold question, as this is her only source of employment income.
PAYG Calculation: Her employer's payroll system is configured to apply the threshold. Tax is only calculated on her income above the pro-rata equivalent of $18,200.
Result: Chloe's net pay is maximised from her first payslip because tax is withheld correctly, preventing over-taxation.
If Chloe had answered 'No', tax would have been withheld from the first dollar she earned. While this overpaid tax would be refunded after she lodged her annual tax return, her cash flow throughout the year would have been significantly lower.
Managing the Threshold with Multiple Jobs
When you have more than one job, a critical rule applies: you can only claim the tax-free threshold from one employer at a time. This ATO rule prevents significant under-taxation and a subsequent tax debt at the end of the financial year.
Each employer's payroll system operates independently. If you claimed the threshold from two employers, you would effectively receive a tax-free benefit of up to $36,400 ($18,200 x 2), resulting in insufficient tax being withheld from your combined income.
Choosing Which Job to Claim From
The standard practice is to claim the tax-free threshold from your highest-paying job. This ensures the tax-free component is applied to the income source where it has the greatest effect, optimising your regular take-home pay.
For all other jobs, you must tick ‘No’ on the TFN declaration form where it asks, "Do you want to claim the tax-free threshold from this payer?". This instructs your secondary employer to withhold tax from the first dollar earned at the 'no tax-free threshold' rates.
Brisbane Scenario: Two Jobs
Liam lives in Sunnybank and works a full-time job in Brisbane city earning $70,000 per year. He also works weekends at a local hardware store, earning an additional $15,000 annually.
Full-Time Job (Higher Income): For his $70,000 role, Liam ticks 'Yes' on his TFN declaration to claim the tax-free threshold.
Weekend Job (Lower Income): For his $15,000 role, Liam must tick 'No' on the TFN declaration. Tax will be withheld from the first dollar he earns at the hardware store.
This ensures that the total tax withheld across both jobs accurately reflects his combined annual income of $85,000, preventing a tax debt. Staying organised with your income statements is crucial.
Withholding Logic for Multiple Income Sources
This diagram shows the correct tax withholding structure for an individual with two jobs.
graph TD;
A[Combined Annual Income: $85,000] --> B[Job 1: Higher Income - $70,000];
A --> C[Job 2: Lower Income - $15,000];
B --> D{Claim Threshold?};
D -- YES --> E[First $18,200 is Tax-Free];
C --> F{Claim Threshold?};
F -- NO --> G[Tax Withheld From Dollar One];Adhering to this structure is the most effective method for managing tax obligations when working multiple jobs.
Common Mistakes and How to Avoid Them
Incorrectly managing the tax-free threshold is a common issue that can lead to an unexpected tax bill. Understanding the primary pitfalls can help you maintain compliance and avoid financial stress.
Mistake 1: Claiming the Threshold from Multiple Employers
This is the most frequent error. Claiming the $18,200 threshold from more than one employer at the same time results in insufficient tax being withheld throughout the year. The ATO's reconciliation process at year-end will identify the shortfall, leading to a tax debt.
How to Avoid It:
Designate One Employer: Nominate your highest-paying job as the one from which you claim the threshold.
Inform All Others: For all other jobs, select ‘No’ on the TFN declaration when asked if you want to claim the threshold.
Mistake 2: Forgetting to Update Your TFN Declaration
When your employment circumstances change, your TFN declarations must be updated. For instance, if you start a new, higher-paying primary job but continue working casually at your old one, you must update the declaration with your former primary employer.
How to Avoid It:
Review on Change: Whenever your primary source of income changes, review the TFN declarations with all your employers.
Lodge a New Form: You can submit a new form to an employer at any time to change your tax withholding instructions.
Mistake 3: Incorrect Claims by Non-Residents
Non-residents and working holiday makers generally do not have access to the standard $18,200 tax-free threshold. Mistakenly claiming it guarantees a tax debt, as you have received a tax benefit to which you were not entitled.
How to Avoid It:
Confirm Your Status: Be certain of your tax residency status before completing any employment forms.
Declare Correctly: If you are a non-resident, this must be stated on your TFN declaration to ensure your employer withholds tax at the correct foreign resident rates from the first dollar.
If you have made an error, it can often be corrected. Our guide on how to amend a tax return in Australia provides information on rectifying past lodgements.
Frequently Asked Questions (FAQs)
What happens if I forget to claim the tax-free threshold?
If you forget to claim the threshold, your employer must withhold tax from the first dollar you earn. This means your take-home pay will be lower than it should be. The overpaid tax will be refunded to you by the ATO after you lodge your annual tax return.
How do I change which employer I claim the threshold from?
You can change which employer you claim the threshold from at any time by lodging a new TFN declaration (or a form) with each employer. For your new primary job, submit a form ticking 'Yes' to claim the threshold. For your other job(s), submit a new form ticking 'No'.
I'm a sole trader, how does the threshold apply to me?
For sole traders, the $18,200 tax-free threshold is applied when you lodge your annual income tax return. You calculate your net business income (total earnings less business expenses), and the first $18,200 of that profit is not taxed. Sole traders are responsible for setting aside money for their tax liability, often through the Pay As You Go (PAYG) instalments system. Our Australian income tax calculator can help estimate your potential tax liability.
Do my superannuation contributions affect my tax-free threshold?
Superannuation contributions do not change the $18,200 threshold itself. However, making personal deductible contributions to your super fund can reduce your overall taxable income. This may lower the amount of your income that is subject to higher tax rates, but the $18,200 threshold remains the first portion of your income that is taxed at zero.
Summary
Key Compliance Points
The tax-free threshold for the 2025–26 Financial Year is $18,200.
It is available in full only to Australian residents for tax purposes.
You must only claim the threshold from one employer at a time.
Major Deadlines
A Tax File Number (TFN) declaration should be completed as soon as you start a new job to ensure correct tax withholding.
If your employment circumstances change, update your declarations promptly.
Risk Areas
The biggest risk is claiming the threshold from multiple employers simultaneously, which will almost certainly result in a tax debt.
Non-residents incorrectly claiming the threshold will face a tax liability.
Brisbane-Relevant Considerations
In a dynamic job market like Brisbane's, individuals often hold multiple casual jobs or change roles frequently. It is crucial to manage TFN declarations actively with each change to prevent incorrect tax withholding.
Need clarity on your situation?
The information in this article is general in nature and does not constitute financial or tax advice. The application of the tax-free threshold can vary significantly based on your residency status, income sources, and personal circumstances.
To ensure your tax affairs are managed correctly and to avoid potential penalties, it is always recommended to seek personalised advice from a qualified tax professional who can assess your specific situation.
Official ATO Reference
ATO Guidance: For detailed official information on the tax-free threshold, refer to the Australian Taxation Office (ATO) page: Claiming the tax-free threshold.
Baron Tax & Accounting Website: https://www.baronaccounting.com Email: info@baronaccounting.com Phone: +61 1300 087 213 Whatsapp: 0450 468 318