Written byThe tax-free threshold is the first $18,200 of income an Australian resident for tax purposes can earn in a financial year before income tax applies.
Also known as: tax free threshold, tax-free income threshold
Key points
- Only Australian residents for tax purposes can claim it; most foreign residents are taxed from the first dollar they earn here.
- You claim it by ticking the tax-free threshold question on the tax file number declaration you give your employer.
- With two jobs you normally claim it against the higher paying one, so that too little tax is not withheld overall.
- The threshold lowers the tax withheld from your pay, and the ATO settles the real figure when you lodge your return.
- A sole trader gets the same threshold, because business profit is taxed as part of your personal income.
How the tax-free threshold works
Income tax in Australia is worked out in brackets. The first $18,200 you earn in a financial year is taxed at nothing. Income between $18,201 and $45,000 is taxed at 15 cents in the dollar in the 2026-27 income year, with higher rates on the brackets above that, and the Medicare levy of 2% is worked out separately.
Your employer does not wait for you to lodge. When you tick the threshold on your tax file number declaration, the employer spreads the tax-free amount across your pay periods, so slightly less is withheld each payday. Money you direct into super through salary sacrifice comes out before that calculation, which is why take-home pay shifts when you change contributions.
Two jobs and part-year income
You get one threshold, not one per job. If you claim it with two employers, each withholds as though your first $18,200 is untaxed, and the shortfall turns up as a bill at tax time. The usual approach is to claim it against the job that pays the most and let the other withhold at the higher rate.
Starting work partway through the year, or leaving the country, changes the sum. Part-year residents get a reduced threshold based on the months they were here, and foreign residents get none at all. If your circumstances changed during the year, the ATO's residency tests decide which treatment applies.
Why it matters when you borrow
Australian lenders assess what you actually take home, not your headline salary. The threshold is already built into your net pay, so payslips and tax returns give a lender the after-tax picture it uses to test affordability and set a borrowing limit.
It matters most for people with several small income sources. Two part-time jobs, a little contracting and some investment income can look fine on paper yet leave a shortfall if the threshold was claimed twice, and an unexpected tax debt shows up in a lender's view of your commitments.
Example
Josh works part time and earns $22,000 for the year. The first $18,200 is tax free and the remaining $3,800 is taxed at the current second bracket rate, which is a few hundred dollars of tax on paper, but the low income tax offset generally wipes that out at his income, and he sits below the Medicare levy low-income threshold, so he is likely to pay nothing. His employer withheld a small amount each fortnight, so lodging his return squares up whatever was over-withheld or under-withheld across the year.
Not to be confused with
- Goods and services tax (GST)
- GST registration has its own turnover threshold, which is a separate test from the income tax-free threshold
Frequently asked questions
How much is the tax-free threshold?
It is $18,200 of income in a financial year for an Australian resident. Income above that is taxed in brackets, starting at 15 cents in the dollar between $18,201 and $45,000 in the 2026-27 income year, with the Medicare levy worked out separately. Rates are published on the ATO website each year.
Can I claim the tax-free threshold on two jobs?
You can tick it on both declarations, but it usually creates a tax debt, because each employer withholds as though your first $18,200 is untaxed. Most people claim it against the higher paying job. If your income changes, you can lodge a new declaration with your employer.
What happens if I earn less than the tax-free threshold?
No income tax applies to that income, but tax may still have been withheld from your pay during the year. Lodging a return, or a non-lodgment advice if you are not required to lodge, is how any over-withheld amount comes back to you.
Do foreign residents get the tax-free threshold?
No. Foreign residents for tax purposes are taxed from the first dollar of Australian income at the foreign resident rates, and they do not pay the Medicare levy. Working holiday makers have their own rate scale. Residency for tax is not the same as your visa status.
Does the tax-free threshold apply to business income?
If you trade as a sole trader or through a partnership, your share of the profit is part of your personal income, so the same single threshold applies. A company is a separate taxpayer, pays the company rate on its profit and gets no tax-free threshold.
Related terms
ATO
The ATO is the Australian Taxation Office, the national tax authority that collects income tax, GST and PAYG, administers superannuation rules, issues rulings and enforces compliance.
Read definitionSole trader
A sole trader is the simplest Australian business structure: one person owns and runs the business, keeps the profits, and is personally liable for its debts.
Read definitionSalary sacrifice
Salary sacrifice is an agreement with your employer to receive less salary in return for benefits paid from pre-tax pay, such as extra super or a novated lease.
Read definitionAffordability
Affordability is whether a person or household can meet the cost of a good, service or loan repayment without giving up essentials or taking on debt they cannot sustain.
Read definitionGoods and services tax (GST)
Goods and services tax (GST) is a broad-based 10% tax on most goods and services sold in Australia, which registered businesses collect on sales and pay to the ATO.
Read definitionPartnership
A partnership is a business structure in which two or more people or entities carry on a business together with a view to profit, sharing profits, losses and liabilities.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.