Tax-Free Threshold
The first $18,200 of annual income that is not subject to income tax for Australian residents.
The tax-free threshold is the amount of income you can earn each financial year without paying any income tax. For Australian residents, this threshold is $18,200. Income above this amount is taxed at the applicable marginal rates. The tax-free threshold is only available to Australian residents for tax purposes — foreign residents pay tax from the first dollar earned.
When you start a new job, your employer asks you to complete a TFN declaration where you indicate whether you want to claim the tax-free threshold. If you have multiple jobs, you should generally only claim the threshold from one employer (usually the one that pays you the most) to avoid under-withholding and a potential tax debt at the end of the year.
The $18,200 threshold is effectively built into the PAYG withholding tables your employer uses to calculate tax on each pay. It equates to $350 per week or $1,517 per month of tax-free earnings. For part-year residents, the threshold is pro-rated based on the number of months you were a resident during the financial year.
How it works
The tax-free threshold is the amount of income — $18,200 a year — that Australian residents can earn before any income tax applies. It's only available to residents for tax purposes; foreign residents are taxed from their first dollar with no equivalent threshold. Once your income exceeds $18,200 for the financial year, only the portion above that amount becomes taxable, at whichever marginal rate applies to it.
You interact with it directly on the TFN declaration form for a new job, where you're asked whether you want to claim the threshold from that employer. It's built into the standard PAYG withholding tables, working out to roughly $350 a week or $1,517 a month of tax-free earnings, so most employees never see it as a separate line item — it's simply baked into how much tax comes off each pay.
The classic mistake is claiming the threshold from more than one employer at once. You're generally meant to claim it only from the employer paying you the most, because the withholding tables assume the full $18,200 applies once, not once per job — claiming it everywhere under-withholds tax during the year and can leave you with an unexpected bill at tax time. Part-year residents also have the threshold pro-rated based on how many months they were a resident, rather than getting the full $18,200.
Example: how much of $20,000 is actually taxable
Suppose your total income for the financial year comes to $20,000, all from a single job where you correctly claimed the tax-free threshold. The first $18,200 of that is entirely tax-free — no tax applies to it at all, regardless of your marginal rate.
That leaves $1,800, which is $20,000 minus $18,200, as the portion of your income that actually falls into a taxable bracket, taxed at whatever marginal rate applies to income just above the threshold. The other $18,200 never enters the tax calculation at all.
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Income Tax
Tax levied by the federal government on your taxable income, calculated using progressive tax brackets.
Tax Brackets
The income ranges that determine the rate of tax applied to each portion of your taxable income.
PAYG Withholding
The system where employers withhold income tax from employees' wages and remit it to the ATO throughout the year.
Foreign Resident Tax Rates
Tax rates for individuals who are not Australian residents for tax purposes — no tax-free threshold and different brackets.
Taxable Income
Your assessable income minus allowable deductions — the figure used to calculate your income tax.