The tax-free threshold is an important part of the tax system in Australia. Understanding the threshold can help individuals and businesses avoid paying unnecessary taxes while managing their finances better.
The tax-free threshold helps low-income earners retain more of their money. Staying under the limit means you are not required to pay any tax and you will receive all tax paid at the end of the financial year.
If you are new to the Australian tax system or if you are not updated with its recent changes, this blog is for you. In the blog we will cover what the tax-threshold is, an example of the tax-free threshold, the Medicare levy, and we will briefly touch on how the tax system works in Australia.
What is the tax-free threshold?
As an Australia resident, if you earn under a certain amount, you don’t need to pay any tax. This amount is called the tax-free threshold.
The tax-free threshold in Australia is an amount of income that is not subject to taxation. For the 2023 financial year, the tax free threshold is $18,200.
For the 2024 financial year, the tax-free threshold is $18,200.
This means that any resident who earns $18,200 or less in a financial year will not be required to pay any income tax at all.
The tax-free threshold can also be view as weekly, fortnightly and monthly in the table below so you can review against your wages cycle.
Example of the tax-free threshold
Let’s take an example of someone who earns only $18,000 per year. Since this amount is below the tax-free threshold, they will not be required to pay any income tax. Now, let’s say over the course of the year, their employer, or various employers withheld $700 of tax from their wages.
They would receive all $700 of this back as a tax refund when they lodged their online tax return. The easiest way to lodge their tax return is to complete an online tax return.
What happens after the tax-free threshold – the tax rates in Australia
The tax rate for the next tax bracket after the threshold has been met is 19%. This means that if someone earns $20,000 per year, they will be required to pay tax on the income of $1,800. You only pay tax on the amount above the tax-free threshold.
When they lodge their online tax return, their tax payable would be $342 ($1,800 x 19%). In this example their employer would likely have withheld this amount from their wages and paid it to the ATO.
Australian tax rates 2024–25
| Taxable income | Tax on this income |
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 16 cents for each $1 over $18,200 |
| $45,001 – $120,000 | $4,288 plus 30 cents for each $1 over $45,000 |
| $135,001 – $190,000 | $31,288 plus 37c for each $1 over $135,000 |
| $190,001 and over | $51,638 plus 45c for each $1 over $190,000 |
Australian tax rates 2023–24
| Taxable income | Tax on this income |
| 0 – $18,200 | Nil |
| $18,201 – $45,000 | 19 cents for each $1 over $18,200 |
| $45,001 – $120,000 | $5,092 plus 32.5 cents for each $1 over $45,000 |
| $120,001 – $180,000 | $29,467 plus 37 cents for each $1 over $120,000 |
| $180,001 and over | $51,667 plus 45 cents for each $1 over $180,000 |
It is worth noting that the tax rates and income thresholds generally change each year, so it is important to check the current rates before filing your tax return. The current tax rates can be found on the ATO website or any tax agents.
Medicare levy
In addition to income tax, Australian residents are also required to pay a Medicare Levy. The Medicare levy is a tax that assists in funding the public health system. The current rate for the Medicare levy is 2% of taxable income.
This commences when you start paying tax and if you earn under the income tax threshold, you are exempt. There are other exemptions based on your circumstances and family income and circumstances.
How the tax system works in Australia
The tax-free threshold in Australia is $18,200 for the 2023 and 2024 financial years. Any resident earning $18,200 or less will not be required to pay any income tax, and those earning above the threshold will be required to pay tax on the amount above the threshold at a rate of 19%.
Remember, we use a marginal tax bracket system in Australia. This means you only pay tax on the amount of your earnings in the applicable bracket.
The Medicare levy is an additional tax that helps to fund the public health system and is payable by those whose taxable income exceeds certain thresholds.
Luckily, when you complete your tax online all the tax rates are built into the tax return, so you need to do nothing except log in and open your tax return. An online tax return only takes 5 minutes to complete and can be done on your mobile phone.
If you want to check your tax, use one of our free tax calculators!
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