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If your total income for the year is in the lowest income or tax bracket, you pay no tax. Once you move out of the lowest bracket and into the next one, you have crossed the threshold from paying no tax to paying at least the lowest rate of tax.
If you are an Australian resident for tax purposes, the first $18,200 of your yearly income is not taxed. This is called the tax-free threshold. Therefore, by claiming the threshold, you reduce the amount of tax that is withheld from your pay during the year.
In 2012–13 the $18,200 tax-free threshold for pay as you go (PAYG) withholding purposes is equivalent to:
When your taxable income exceeds your tax-free threshold you pay tax on the excess.
Your tax-free threshold may be less than $18,200 in a financial year if you either:
From 1 July 2012, part-year residents will be able to access a tax-free threshold of at least $13,464. Access to the remaining $4,736 of the full tax-free threshold will be pro-rated. For part-year residents, the tax-free threshold is calculated as:
($4,736 x number of months as a resident of Australia)12
For more information, refer to Tax-free threshold - for individuals.
Compare John, who was a resident for three months, with Bill, who was an Australian resident for the whole income year. They both earn $16,000 in the financial year.
John can claim the threshold for the three months he was a resident. He works out his threshold amount as:
($4,736 x 3) 12
Since John’s tax-free threshold for the year is $14,648, any income he earns in excess of $14,648 is assessable. If he has no deductions, John must pay tax on:
= $16,000 – $14,648 = $1,352
He will be taxed at the rate of 19%, which means his tax bill for the year is $256.88.
Bill pays no tax because his income is below the tax-free threshold of $18,200 for a full year.
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