What Is The Tax-Free Threshold?
The effective tax free threshold in 2020-21 for lower income earners (before other offsets) is $23,227. The threshold has increased over the years from 2018-19 to 2020-21, because of the addition of the Low & Medium Income Tax Offset, and subsequently an increase in value of the Low Income Tax Offset.
The first table below shows the current nominal tax-free thresholds updated to reflect the modified tax rates in accordance with the currently legislated and known tax scales.
These tables were last updated following the 2021 Budget (11 May 2021), and take into announcements which have since been enacted.
- What Is The Tax-Free Threshold?
- Nominal (before offsets) Current Tax Free Thresholds and First Step Marginal Tax Rates
- Offsets Lift the Tax Free Threshold
- The Effective Tax-Free Thresholds After LITO and LMITO Taken Into Account
- Two or more jobs, with total income less than the tax-free threshold?
- What Is Bracket Creep? How The Tax Brackets Work In Australia
- Bracket creep and its fiscal impact – government report
- Where the current tax rates came from
- Claiming The Tax Free Threshold in Your PAYG Tax Withheld
Future tax rates are subject to future policy and legislative changes.
For individuals, the actual tax free threshold position depends on the offsets you are entitled to. Offsets in effect create a tax-free area on incomes just above the first step marginal tax rate.
The second table further down on this page shows these higher thresholds with minimum tax offsets taken into account.
Note that for non-residents, there is generally no tax-free threshold.
Marginal Tax Rate
Offsets Lift the Tax Free Threshold
The availability of tax offsets have the effect of lifting the tax-free threshold for those entitled. Pensioners for example, are shielded from tax at higher levels than the basic scale based on a sliding income scale and partnered status.
The Effective Tax-Free Thresholds After LITO and LMITO Taken Into Account
In conjunction with the tax-free threshold, the Low Income Tax Offset (“LITO”) and for the periods applicable, the Low and Middle Income Tax Offset (“LMITO”), have the effect of increasing the minimum taxable income taxing point for most lower income earners.
Medicare levy is usually not applicable for taxpayers at the lowest income levels, but shades in for incomes over the minimum threshold.
The following table shows the effective tax-free thresholds for the same years as above, taking into account the low-income offsets, and assuming exemption from Medicare:
(the position as of 12 May 2021 following the 2021 Budget)
|2015-16||$445 **||$20,542 **|
*** As things stand (12 May 2021) the LMITO is scheduled to end with the 2021-22 year, although the government has already seen fit to extend its time frame twice, to the 2021 and 2022 years. Unless it is extended again, or there is some other low income rate adjustment, the effective low income tax-free threshold for 2022-23 will revert back to the previous (less generous) level of $21,885. The tax offset reduction at the lower income levels is $255.
** A tax reduction which was to apply from the 2015-16 year has since been repealed. See further on this here.
The calculations in the above tables were produced with our free spreadsheet calculator.
Two or more jobs, with total income less than the tax-free threshold?
There is effectively only one tax free threshold which is delivered to you automatically by the arithmetic of your tax assessment. The tax assessment is calculated according to the tax scale which has the tax-free threshold built in.
This means you don’t have to worry about eventually getting the tax-free allowance. But it can be a problem when submitting TFN declarations to employers – because normally only one such declaration may be made claiming the tax free amount. The tax free amount may be more than the income from a single source.
Thus in some situations higher-than-required tax is withheld from the wages earned from a second or third job. The employee taxpayer then has to wait until the end of the year assessment to get the tax refunded if total taxable income is not high enough to attract tax.
The Tax Office is aware of this problem, and has indicated that when you are certain that tax being withheld is too much, you can apply to have it reduced. There are penalties for getting the calculations too far wrong in your favour, and so professional advice is recommended to avoid errors. If you want to forecast the tax on your annual income you can use this free annual tax calculator here which uses the actual tax rates for the current year.
What Is Bracket Creep? How The Tax Brackets Work In Australia
The tax brackets in Australia are structured as a set of income bands, or ranges, each with its own tax rate.
For example, the 2022-23 tax year income brackets (resident adults) is as follows:
|Income Bracket||Tax Rate %|
|0 to $18,200||Nil|
|$18,201 to $45,000||19%|
|$45,001 to $120,000||32.5%|
|$120,001 to $180,000||37%|
|$180,001 and over||45%|
The effect of this structure is that the higher the overall income, the greater overall percentage of tax is paid. The average tax rate measured at bracket intervals demonstrate this effect, as shown in the following table:
|Taxable Income||Tax Payable||Tax % of Income|
An obvious problem with this structure is the normal effect of inflation. As the cost of living increases, the accompanying upward trend in incomes pushes taxable income into a higher tax bracket.
Australian tax rates are not automatically adjusted for the effect of inflation. So unless some adjustment is made, more tax is paid at a higher income bracket, even though “real” wages haven’t increased. After tax spending power is eroded.
This bracket-creep effect gives the Treasurer passive access to higher tax revenues without any action needing to be taken. Inflation does the job.
Offsetting bracket creep is the periodic upward adjustment of bracket thresholds, and increasing the size of each tax bracket so that movement into a higher tax interval for an individual is likely to occur less often. Such tax scale adjustments are currently not built in to the tax legislation, and so are not automatic. Any adjustment relies on politicians to propose and approve the necessary tax law amendments.
With fewer tax brackets, the perceived impact of a movement from one tax bracket to the next could be higher (albeit comparatively less often), perhaps providing a disincentive for some to earn more income.
A look at the basic tax scales over the years since 1950 shows pattern of upward adjustment of tax bracket thresholds. Noticeable also is that personal tax scales many years ago had many more steps than the current scale with 5 levels.
For more analysis on this and an interesting interactive chart of the tax rates over the past 60 years or so, have a look here: Interactive: Income tax & bracket creep – why you pay more tax.
Bracket creep and its fiscal impact – government report
In September 2021 the federal Parliamentary Budget Office released a report “Bracket creep and its fiscal impact” which is a useful explainer of the impact of bracket creep, both on taxpayers and the government’s financial position.
Key findings from the analysis, include
- bracket creep still affects those whose income growth does not push them into a higher tax bracket. This is because the average tax rate moves upwards with increases in income, regardless of whether a higher tax bracket is entered on the top income slice.
- Bracket creep does not affect all taxpayers equally, even if their income is growing at the same rate. The effect is largest for individuals earning just above a tax threshold.
- Bracket creep has played a key role in fiscal consolidations of the past and it is the most important factor in increasing the tax-to-GDP ratio over the next decade.
The report is available online. See Bracket creep and its fiscal impact (Parliamentary Bdget Office)
Where the current tax rates came from
Rates and thresholds from the 2012-13 year forward were established as part of the “Household Assistance” package announced by Prime Minister Julia Gillard in 2011, associated with the introduction of the carbon pricing reforms.
This was the most significant uplift of the tax free threshold for many years, from $6,000 to $18,200. This effectively became $20,542 when the LITO of $445 was taken into account for years 2012-13 through to 2017-18.
By lifting the nominal tax-free threshold, one of the stated intentions was to relieve lower income earners from the obligation to lodge a tax return and pay tax.
Separate rules apply to minors and trust beneficiaries, superannuants/retirees and other categories of taxpayer, including seniors, and the actual tax free-threshold in each case will depend on a number of possible factors and circumstances. Seniors and others entitled to other offsets may have a higher effective tax-free threshold than indicated in the above table.
The lowest tax threshold in Australia for resident adult individuals increased from $6,000 in the 2011-12 tax year, to $18,200 for the 2012-13 financial year (commencing 1 July 2012) and following financial years.
Due to the existence of various tax offsets, the effective level of income at which tax is payable for most residents taxpayers is significantly higher than the nominal tax free threshold amount scale amount.
The range of available tax offsets can significantly lift the taxing thresholds. A listing of the more common tax offsets can be found here.
Non-resident adult individual tax scales not do not provide the benefit of a tax-free allowance, or of the Low Income Tax Offset, all tax thresholds effectively being zero. The upside for non-residents is not having to pay the Medicare levy. The non-resident tax scales can be reviewed here.
Resident minors taxed on “unearned” income receive the lower tax-free threshold of just $416; non-residents the threshold is zero. See Tax on Children
The tax thresholds for other entities, including companies is generally zero, with no tax free allowance. The significant exception is eligible non-profit entities which receive a tax-free allowance of the first $416 of taxable profits.
Claiming The Tax Free Threshold in Your PAYG Tax Withheld
Where entitled, be sure to claim the tax free threshold. Employers are required to follow the Tax Withholding declaration that employees submit to them; so if the tax free threshold is not claimed when entitled, too much tax would be withheld. This excess tax would normally only become available as a credit or refund after the next annual tax assessment.
Since 1 July 2012
With the increase in tax free threshold to $18,200 it is more likely than before that some employees’ total income from more than one job is under the tax free threshold.
In that case it is permissible to lodge a further declaration claiming the tax free threshold at a second job, as long as you are sure that total income will not become taxable.
If the income subsequently rises over the limit, a declaration can be resubmitted without a tax free threshold claim, or to withhold extra, in order to avoid or minimise any shortfall on the year-end tax assessment.
The withholding declaration form and instructions can be downloaded from the ATO here
See also: Changes in average personal income tax rates: distributional impacts (Parliamentary Budget Office, issued 11 October 2017)
This page was last modified 2021-10-06