Tax-Free Threshold

The tax-free threshold is the first $18,200 of income each financial year on which Australian resident taxpayers pay no income tax. Tax only starts above it, at 16% on income from $18,201 to $45,000. It is the reason low-income workers often pay no tax at all, and the reason your effective rate always sits under your marginal rate.

You claim the threshold through the Tax File Number declaration you give your employer. Ticking yes tells their payroll software to withhold tax as if the first $18,200 of your annual income is free. The trap is that the system assumes you claim it with only one employer at a time. Claim it with two jobs and both payrolls grant you the threshold, so about $18,200 of income gets taxed twice-free and the ATO sends a bill at tax return time. Claim it nowhere and you overpay all year, then wait for a refund, while non-residents for tax purposes do not get the threshold at all and pay tax from the first dollar.

The threshold operates through PAYG withholding, not through a form you file once a year. When you tick 'yes' to claiming the tax-free threshold on your TFN declaration, the employer's payroll software uses ATO tax tables that treat the first $18,200 of annual income as taxed at nil. Withholding each pay period is effectively an estimate of your annual tax, spread across your pays. If your income stays roughly steady, the withheld amount lands close to your actual liability.

When you tick 'no', or never hand in the declaration, payroll uses the no-threshold schedules. Those tables withhold at higher rates from dollar one, because they assume your other employer is already granting you the threshold. At tax return time the ATO reconciles everything: total income, total withheld, one threshold per person. Any mismatch becomes a refund or a bill.

Second jobs are where this bites. Your main employer applies the threshold; your second employer is told not to, so every dollar there is withheld at marginal rates from the start. That feels brutal on the payslip but is approximately correct, because your total income has already used up the free slice elsewhere. Update the TFN declaration whenever jobs change — it is a two-minute form, not a life decision.

The threshold decides whether your payslip is roughly right or quietly wrong for twelve months. Claimed correctly, withholding tracks your true liability and your tax return is a formality. Claimed wrong, you either lend the ATO thousands interest-free or borrow from it at the price of a July panic.

A colleague named Brent (yes, that Brent) claimed the threshold at his full-time job and again at his weekend hospo gig, because 'tick yes' felt like the optimistic answer. Both payrolls granted him $18,200 of free income. The ATO granted it once, and Brent's refund season became a bill season of roughly $2,900, plus his narration of the injustice to anyone within earshot.

The highest-leverage thing most Australians with two jobs can do is spend ninety seconds on a TFN declaration update. Check the damage scenarios with the second job tax calculator and verify withholding with the PAYG withholding calculator. Claiming correctly is the cheapest tax planning in the country: it is free, it is instant, and it prevents Brent's annual festival of surprise.