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New Tax Free-Threshold

Posted by Ronny on February 18, 2013 at 12:20 AM


Ronny Khan (B.Bus, CPA ASA)    


Tax Free-Threshold: Earn less than $18,200 & pay no tax

Since 1 July 2012, if you are an Australian resident for tax purpose and your total income for the year is less than $18,200 you pay no tax since your total income is in the lowest income tax bracket. This is called the tax-free threshold. Therefore, by claiming the threshold, you reduce the amount of tax that is withheld from your pay during the year.

However,your tax-free threshold may be less than $18,200 in a financial year in the following situations: if you either

·       entered Australia permanently during the year

·       left Australia permanently during the year

·       are not a resident of Australia for tax purposes

The higher tax free threshold would be beneficial for some tax payers for example part time workers(e.g. students) & small business owners(sole traders) who run a micro business and earn less than $18,200. You would be able to earn up to $20,542 (from the currentfinancial year) before any income tax is payable, when taking into account the lowincome tax offset.

If you have earned less than the tax-free threshold during the financial year, what do you need to do?

You need to work out if you must lodge a tax return. You must lodge a tax returnif:

·       Your payment summary shows you have had tax withheld

·       You have paid tax under the PAYG instalment system.

What if you have more than one payer?

If you have more than one payer at the same time, ATO generally requires that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage (this is known as the primary source of income).If you earn additional income (for example, from a second job or a taxable pension), your second payeris required to withhold tax at the higher 'no tax-free threshold' rate. If yoursecond payer does not withhold a higher rate of tax, this may lead to a taxdebt at the end of the financial year. However, if you are certain your totalincome for the year will be less than $18,200 you can claim the tax-freethreshold from each payer.

Tax rates & how it works for others:

Tax rates 2012-13: The following rates for 2012-13 apply from 1 July 2012.  

Taxable income             Tax on this income

0 - $18,200 :                           Nil

$18,201 - $37,000   :        19c for each $1 over $18,200

$37,001 - $80,000   :        $3,572 plus 32.5c for each $1 over $37,000

$80,001 - $180,000 :        $17,547 plus 37c for each $1 over $80,000

$180,001 and over   :        $54,547 plus 45c for each $1 over $180,000

The above rates do not include the Medicare levy of 1.5% (seek Guide to Medicare levy for more information).

To make this simple, let’s assume you are resident for tax purpose for full financial year and you earn $80,000 per year.

According to the 3rd tax bracket,immediately you would need to pay $3572, along with 32.5 cents per $1 over$37,000.

This equates to 32.5 cents x (times) $43,000.That comes to $13,975. Now add this number with the $3,572 and you will get the total amount of income tax you are liable for. In this instance, it comes to$17,547 (Medicare levy is not included here, however for a full Medicare levy paying tax payer in this instance Medicare levy would be $1200 in addition to$17,547 ) .

Use this as a guide only. However, the more tax deductions you can find, the less tax you will need to pay. Always seek advice from registered tax professional if in doubt.


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Categories: Professionals

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