It may sound simple, but knowing when to tick the tax free threshold on your employee forms is important. Ticking the wrong box could leave you with a tax debt at the end of the financial year.
What is the tax free threshold?
The tax free threshold is an amount of money that the Government have declared to be tax free. Meaning if you earn under the tax free threshold, you will not pay tax on that income. As at 2017/2018 the tax free threshold is $18,200.
Once you earn over this amount, your tax liability increases. The tax free threshold still applies, but each $1 earned over that amount is taxable income. For example, if you earn $35,000 per year, you will be taxed on $16,800 which is the first tax bracket meaning you pay 19 cents of every dollar over the threshold.
How do I claim the Tax Free Threshold?
A form is given to you when you start a new job by your new employer called “Tax File Number Declaration”. On this form you will be asked at question 8 “Do you want to claim the tax free threshold from this payer?”. This is where you tick ‘Yes’ or ‘No’. You will also complete this form if you are applying for Centrelink Payments.
So, Do I Automatically Tick The “Yes” box?
Short answer is no, you wouldn’t automatically select ‘Yes’. However, in most cases, you would be selecting ‘Yes’ to the tax free threshold question. If you are only going to be receiving one taxable income from a single employer, then you will select ‘Yes’. This is because you will want to claim the tax free threshold. Basically, if you only have one employer, you will select ‘Yes’.
What If I Have Two Jobs?
This is when you will most likely need to tick the no box – at least for one of your employers. If you select yes to both employers, you will end up paying too little tax. As a result, you will most likely receive a tax bill when you do your tax return. This is because not enough tax has been charged against you. If you have two jobs and receiving a taxable income from both, you would select the highest paying job as your tax free threshold payer.
Your taxable income in this instance is calculated on both jobs. For example, if you are working a job that is bringing you in $30,000 per year from Employer A and another job that is bringing you in $25,000 a year from Employer B, your taxable income is $55,000. In this case you would select employer A as your tax free threshold being the higher paying of the 2 jobs.
If, for some reason your taxable income ends up being below the tax free threshold, or you earn less that financial year, then you will most likely receive a tax refund.
If you are unsure what to fill in on your Tax File Declaration Form or any other tax form, please contact your accountant to clarify. Alternatively, you can make an appointment with us and we’d be more than happy to guide you through your tax journey.