Claiming the tax-free threshold: getting it right

If you’re an Australian resident for tax purposes, you don’t have to pay income tax on the first $18,200 you earn each year, from any source. This is called the “tax-free threshold”. If you have more than one job, change employers during the year, have a sole trader side gig or get government payments, it’s important to think about the tax-free threshold and which employer, job or payment you’ll claim it for. Getting this right will help avoid unexpected tax debt when lodging your return.

To make sure your employers withhold enough tax from your take-home pay, the ATO generally advises you should claim the tax-free threshold once, from your “main” payer. Broadly, this means claiming it from the job, gig or payment that pays you the most during the year. That payer will not withhold income tax from the first $18,200 they pay you, but will withhold tax from payments once your earnings go over the threshold.

When you do your tax return at the end of the financial year, the ATO adds up your income from all sources, and all tax withheld from that total income. If not enough tax has been withheld, you can expect a tax bill. If more tax has been withheld than you owe for your total earnings, you can expect a refund. 

Claim the tax-free threshold

When you start a new job, your employer should ask you to complete a withholding declaration (as well as records like a tax file number declaration and super standard choice form). They may give you an electronic or paper form, or you can download one from the ATO website, or use ATO online services via your myGov account.

To claim the tax-free threshold, you must be an Australian resident for tax purposes (although some exceptions apply) and indicate this on the declaration, then answer “yes” to the question “Do you want to claim the tax-free threshold from this payer?”. Where you answer “no”, tax will be withheld from all income from that payer.

It’s best not to claim the threshold from multiple payers at the same time unless you’re completely sure you’ll earn less than $18,200 in total for the year. Overclaiming might make your take-home pay higher each pay cycle, but will likely mean a tax debt later. 

Changing jobs

If you change jobs during the income year, your previous employer stops paying you. This means you’ll automatically no longer be claiming the tax-free threshold from them. You can claim the threshold from your new payer even if you have claimed it from your previous employer.

If you add a job or side gig that will provide more income than your existing main payer, you can change your claim at any time.

Altering your tax-free threshold claim

The easiest way to change your claim is using ATO online services, linked to your myGov account. 
Sign in to myGov, go to ATO online services, and select Employment from the menu. Then select either:

• New employment: to complete your tax details or choose a super fund or both for a new employer, or provide your tax file number to your superannuation fund; or 
• Employment details: to view and update your tax or super details with your current employer.

Select the dropdown box beside your current employer’s business name/ABN to view your tax and super details. If your current employer isn’t displayed or the Update button isn’t available, select New employment.

Don’t forget your side gig

Remember that if you’re earning income outside of employment (eg as a sole trader) you’ll need to pay tax yourself on that income. This may mean putting a percentage aside for tax each time you’re paid, or using pay as you go (PAYG) instalments. How much you’ll need to pay depends on your total combined income for the year, and how much total income tax is withheld by your employers.

Source: ATO - Tax Free Threshold - Individuals and Families ; ATO Community - How much tax should I pay on my second job ; ATO Community - Tax tips for managing your side hustle