In Australia, individuals have the option to claim a tax free threshold on their income. This means that they are able to earn a certain amount of money without paying any tax on it. Currently, the tax free threshold in Australia is set at $18,200.
But what happens if someone chooses not to claim this tax free threshold? Will they end up paying more taxes? How will it affect their overall income and taxes?
In this article, we will explore the consequences of not claiming the tax free threshold in Australia, as well as the potential benefits and drawbacks of doing so.
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What is the Tax Free Threshold?
Before we dive into the effects of not claiming the tax free threshold, let’s first understand what it actually is.
The tax free threshold is an amount of money that individuals can earn without having to pay any income tax on it. This means that if your income for the financial year is below this threshold, you won’t have to pay any taxes on it.
As mentioned earlier, the current tax free threshold in Australia is set at $18,200. This means that if you earn less than $18,200 for the year, you won’t have to pay any taxes on that income.
Benefits of Claiming the Tax Free Threshold
There are several benefits to claiming the tax free threshold in Australia. The most obvious one is that it allows individuals to earn a certain amount of money without paying any taxes on it. This can be especially beneficial for those who have lower incomes or are just starting out in their careers.
Another benefit is that claiming the tax free threshold can potentially lower your overall tax liability for the year. This is because the income that falls below the threshold will not be taxed, leaving you with a lower taxable income and therefore, a lower tax bill.
The Consequences of Not Claiming the Tax Free Threshold
Now let’s look at the consequences of not claiming the tax free threshold in Australia. First and foremost, if you don’t claim the tax free threshold, you will end up paying more taxes on your income.
For example, if you earn $25,000 for the year and choose not to claim the tax free threshold, your taxable income will be $25,000 instead of $6,800 (the difference between $25,000 and the tax free threshold of $18,200). This means that you will end up paying taxes on an additional $18,200.
Additionally, not claiming the tax free threshold can also result in a higher overall tax rate. This is because your entire income will be taxed at a higher rate compared to if you had claimed the tax free threshold.
Another consequence of not claiming the tax free threshold is that you may end up owing taxes to the Australian Taxation Office (ATO) at the end of the financial year. This can be a surprise for those who are used to receiving a tax refund and can potentially cause financial strain if not planned for properly.
Why Someone Might Choose Not to Claim the Tax Free Threshold
Despite the potential consequences, there are some instances where individuals may choose not to claim the tax free threshold in Australia.
One reason could be if you have multiple sources of income and your total income for the year exceeds the tax free threshold. In this case, it might make more sense to not claim the tax free threshold on one of your incomes and potentially lower your overall tax liability.
Another reason could be if you are a non-resident for tax purposes. Non-residents are not eligible to claim the tax free threshold and must pay taxes on their entire income at a higher rate.
How to Claim the Tax Free Threshold
Claiming the tax free threshold is relatively simple. When starting a job, individuals will need to fill out a tax file number declaration form. This form includes a section for claiming the tax free threshold, where individuals can choose to claim it or not.
If you have already started a job and didn’t claim the tax free threshold, you can submit a new tax file number declaration form to your employer with the updated information.
Conclusion
In conclusion, claiming the tax free threshold in Australia can have many benefits, such as allowing individuals to earn a certain amount of money tax-free and potentially lowering their overall tax liability.
However, not claiming the tax free threshold can result in paying more taxes on your income and potentially owing taxes at the end of the financial year.
Ultimately, it is important for individuals to carefully consider their personal situation and make an informed decision on whether to claim the tax free threshold or not. Consulting with a financial advisor or accountant can also be helpful in understanding the potential consequences and benefits of either option.
