Tax

Tax-Free Threshold in Australia: Who Can Claim It and How (2026)

22 June 2026 · 9 min read

Quick Answer

Australian residents can claim the tax-free threshold on their first $18,200 of income each financial year, meaning no tax is withheld up to that amount. You claim it by ticking 'Yes' on your Tax File Number (TFN) declaration when starting a job. You can only claim it from one employer at a time — claiming it from two employers simultaneously leads to a tax debt at EOFY.

Every year, thousands of Australians overpay tax because they don't claim the tax-free threshold — or underpay because they claim it incorrectly at multiple jobs. The threshold is simple in concept: the first $18,200 you earn in a financial year is tax-free. But the rules around who qualifies, when to claim it, and what happens when your situation changes catch a lot of people out.

This is especially true for freelancers, sole traders, migrant workers, and anyone juggling multiple income streams. If you're a sole trader, your tax-free threshold still applies — but it works differently because no employer is withholding tax on your behalf. You need to factor it into your own PAYG instalments and end-of-year tax return.

This guide covers the 2025–26 financial year rules. It explains exactly who can claim the threshold, how to claim it, what the Low Income Tax Offset adds on top, and the specific situations — visa holders, multiple jobs, part-year residency — where people get it wrong. We'll also flag one time-sensitive payroll change: if you employ anyone, the Payday Super rules take effect on 1 July 2026, nine days away, and they interact with how you manage employee tax obligations.

What Is the Tax-Free Threshold and How Much Is It?

The tax-free threshold means Australian tax residents pay zero income tax on the first $18,200 they earn in a financial year (1 July to 30 June). This figure is set under the Income Tax Rates Act 1986 and has not changed since the 2012–13 income year. Every cent above $18,200 is taxed at the resident marginal rates starting at 19 cents per dollar (on income from $18,201 to $45,000 in 2025–26).

On top of the threshold itself, the Low Income Tax Offset (LITO) effectively extends your tax-free amount. For 2025–26, the maximum LITO is $700, applied automatically by the ATO when you lodge your tax return. When you combine the $18,200 threshold with the full LITO, a resident taxpayer effectively pays no net income tax until their taxable income exceeds approximately $21,884. The ATO's tax withheld calculator already factors this in when employers calculate PAYG withholding.

It is worth being precise: the tax-free threshold reduces your tax liability — it does not mean the ATO ignores income below $18,200. You still need to lodge a tax return if your employer withheld tax, if you had multiple income sources, or if you ran a business as a sole trader. The threshold is applied when your total tax for the year is calculated, not before.

ATO rule: The tax-free threshold applies to your total taxable income for the year — not per job, not per invoice. If you earn $10,000 from one client and $12,000 from another, your combined $22,000 taxable income is above the threshold and tax will be owed on $3,800.

Key numbers at a glance

$18,200 — tax-free threshold for Australian residents (2025–26)
19% — tax rate on income from $18,201 to $45,000
$700 — maximum Low Income Tax Offset (LITO) for 2025–26
~$21,884 — effective tax-free amount when LITO is included
No change to the $18,200 figure since 2012–13

Who Can Claim the Tax-Free Threshold?

You can claim the tax-free threshold if you are an Australian resident for tax purposes for the full financial year. Tax residency is not the same as visa status or citizenship — the ATO uses a residency test based on factors including how long you've been in Australia, where your home is, and where your economic ties are strongest. Most people on permanent resident visas or who have lived in Australia long-term will meet the resident test.

Temporary visa holders — including international students, working holiday makers, and 482 employer-sponsored workers — need to check their status carefully. International students on a Student visa (subclass 500) are often Australian tax residents if they are living here for more than six months and intend to stay. Working holiday makers (subclass 417 and 462) are specifically excluded from claiming the threshold under the tax rules that apply to them; they are taxed at 15% on every dollar up to $45,000 regardless of the threshold.

Non-residents for tax purposes cannot claim the threshold at all. They are taxed at 32.5 cents per dollar from the first dollar of Australian-sourced income. If you arrived in Australia part-way through the financial year and became a resident from that date, you can claim a partial threshold. The ATO's online residency tool at ato.gov.au is the definitive way to check your status if you are unsure.

Visa check: If you are on a working holiday visa (417 or 462), do not tick 'Yes' to the tax-free threshold question on your TFN declaration. Doing so will result in under-withheld tax and a debt at EOFY. The ATO charges the 47% top rate as a penalty if you fraudulently claim the threshold.

Threshold eligibility by visa and residency status

Australian citizens and permanent residents — can claim (full year)
International students on subclass 500 — usually can claim if resident for tax purposes
Working holiday makers (subclass 417/462) — cannot claim; taxed at 15% from dollar one
Temporary Skill Shortage visa (subclass 482) workers — depends on residency test
Non-residents — cannot claim; taxed at 32.5% from dollar one
Part-year residents — pro-rated threshold applies from the date residency began

How to Claim the Tax-Free Threshold: Step by Step

You claim the tax-free threshold by completing a Tax File Number (TFN) declaration form when you start a new job. On the form, question 8 asks: 'Do you want to claim the tax-free threshold from this payer?' If you tick 'Yes', your employer uses a lower withholding rate — meaning more money in each pay. If you tick 'No', they withhold at the higher no-threshold rate, which can result in a refund at EOFY but reduces your take-home pay during the year.

The TFN declaration is submitted to your employer, who reports it to the ATO via Single Touch Payroll (STP). You do not send the form directly to the ATO. If you change jobs mid-year, you fill out a new TFN declaration for the new employer. If you want to change whether you're claiming the threshold with your current employer — for example, because you picked up a second job — you submit a new TFN declaration to that employer.

For sole traders, there is no TFN declaration because you have no employer withholding tax for you. Your tax-free threshold is simply applied when you lodge your individual income tax return (via myTax or a registered tax agent). If your expected income is above $18,200, the ATO may ask you to pay PAYG instalments quarterly throughout the year so you don't face a large tax bill in one go. SAB Account AI's dashboard at sabaccountai.com helps sole traders track their running income total against the threshold so there are no surprises at EOFY.

STP link: Since Single Touch Payroll is mandatory for all employers in Australia (including those with one employee), your tax-free threshold election is reported to the ATO automatically every pay cycle. You don't need to file anything separately.

The Multiple Jobs Trap: Why You Can Only Claim It Once

You can only claim the tax-free threshold from one employer at a time — the one who pays you the most, or your primary job. This is the single most common tax mistake made by Australians with multiple jobs, side businesses, or freelance income. If you claim the threshold at both Job A and Job B, both employers withhold less tax assuming you earn under $18,200 from them — but your combined income is well above the threshold, and you end up with a tax debt at the end of the year.

For example: if you earn $20,000 from an employer and $15,000 from freelance work invoiced through your ABN, your total taxable income is $35,000. The first $18,200 is tax-free, but the remaining $16,800 is taxed at 19%. If your employer was withholding as if your total income was only $20,000, and your freelance income had no withholding at all, you will owe tax on the freelance portion when you lodge.

The correct approach: claim the threshold at your primary (highest-paying) employer, and tick 'No' at any secondary employer. For your ABN or sole trader income, use the ATO's PAYG instalment system or set aside approximately 25–30% of net income in a separate account to cover your tax liability. SAB Account AI automatically flags when your running invoice total approaches and exceeds the $18,200 threshold so you know when to start setting aside tax.

ATO rule: Only claim the tax-free threshold from the employer who pays you the most. For all other employers, tick 'No' on the TFN declaration. If your situation changes — you quit a second job, for instance — you can submit a new TFN declaration to update your primary employer.

Tax-Free Threshold for Sole Traders and ABN Holders

Sole traders are individual taxpayers — your business income is reported on your personal tax return (not a company return), so the $18,200 tax-free threshold applies to you. However, no one withholds tax on your behalf. When a client pays your invoice, they pay the full amount — there is no automatic PAYG withholding unless you are engaged as a contractor under a voluntary withholding arrangement.

This means sole traders need to manage their own tax obligations proactively. If you expect to earn more than $18,200 in a financial year, the ATO will likely enrol you in the PAYG instalment system after your first tax return. Instalments are due quarterly — typically in October, February, April, and July. For the 2025–26 year, the instalment rate is calculated based on your prior year tax. Missing these instalment dates can attract a General Interest Charge (GIC) from the ATO.

One practical note: if you also have a part-time job as an employee and you are a sole trader on the side, your employer handles the withholding on your employment income. Make sure you have claimed the threshold from your employer (your primary income source), and that you are setting aside tax on your sole trader income separately. Tools like SAB Account AI at sabaccountai.com let you see your total income — employment plus sole trader — in one place, making it easier to estimate your end-of-year tax position.

EOFY tip: If you are lodging your 2025–26 tax return and your sole trader income was below $18,200 for the full year, you may not owe any income tax — but you still need to lodge a return to confirm it and to receive any tax refund from PAYG instalments you already paid.

Sole trader tax threshold checklist

Sole trader income is reported on your individual tax return — the $18,200 threshold applies
No automatic withholding on ABN invoices — you must manage your own tax
PAYG instalments are triggered after your first tax return if your income exceeds the threshold
Quarterly instalment due dates: October, February, April, July
Missing PAYG instalment deadlines attracts the ATO's General Interest Charge

Employers: How the Threshold Affects Your Payroll Obligations

If you employ staff, you must use the correct ATO tax withholding tables based on each employee's TFN declaration. When an employee claims the tax-free threshold, you use the lower withholding column in the ATO's weekly, fortnightly, or monthly tax table. When they don't claim it, you use the higher withholding column. Using the wrong column — even by mistake — can expose your employee to a tax debt or refund and may attract ATO scrutiny of your payroll reporting.

Every employer must report payroll data including tax withheld through Single Touch Payroll (STP) each pay cycle. The ATO cross-references this against employees' individual lodgements. If your withholding doesn't match your STP reports, you'll receive a letter from the ATO. For businesses with employees earning close to the $18,200 threshold — casual workers, part-time staff, seasonal employees — it's worth reviewing TFN declarations annually to confirm the threshold status is still correct.

With Payday Super starting on 1 July 2026 — just nine days away — employers will also need to pay superannuation on or before each payday rather than quarterly. This is a major cash flow change for small businesses. While Payday Super is separate from the tax-free threshold, both changes take effect in the same payroll run. If you are updating your payroll system for Payday Super compliance right now, it is the perfect time to also audit your employees' TFN declarations and withholding codes to make sure the threshold is being applied correctly.

Deadline: Payday Super begins 1 July 2026. From that date, super must be paid on or before each payday. Use this week to audit employee TFN declarations and withholding rates at the same time — two compliance tasks, one review.

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Frequently asked questions

What is the tax-free threshold in Australia for 2025–26?

The tax-free threshold is $18,200 per financial year for Australian tax residents, unchanged since 2012–13. Combined with the Low Income Tax Offset of up to $700, most residents effectively pay no net income tax until their taxable income exceeds approximately $21,884.

Can I claim the tax-free threshold if I am on a student visa in Australia?

International students on a subclass 500 visa can usually claim the tax-free threshold if they meet the ATO's Australian tax residency test — typically by living in Australia for more than six months with an intention to stay. Check your residency status using the ATO's online tool at ato.gov.au before ticking 'Yes' on your TFN declaration.

Can I claim the tax-free threshold at two jobs?

No. You can only claim the tax-free threshold from one employer — your primary or highest-paying job. Claiming it at two employers simultaneously results in under-withheld tax and a debt when you lodge your tax return.

Can working holiday makers claim the tax-free threshold?

No. Working holiday makers on subclass 417 or 462 visas are taxed at a flat 15% on their first $45,000 of Australian income and cannot claim the tax-free threshold. Claiming it incorrectly can result in a tax debt and potential ATO penalties.

How do I claim the tax-free threshold as a sole trader?

Sole traders do not fill out a TFN declaration — the threshold is automatically applied when you lodge your individual income tax return via myTax or a tax agent. If your sole trader income is expected to exceed $18,200, the ATO will enrol you in quarterly PAYG instalments.

What happens if I forgot to claim the tax-free threshold?

If you didn't claim the threshold and your employer withheld tax at the higher no-threshold rate, you will likely receive a tax refund when you lodge your annual tax return — the ATO recalculates your liability and refunds the excess. Submit a new TFN declaration to your employer going forward to get the lower withholding rate applied immediately.

Does the tax-free threshold apply to superannuation contributions?

The $18,200 tax-free threshold applies to your taxable income — which is your gross income minus allowable deductions. Employer super contributions (11.5% for 2025–26) are paid on top of your salary and taxed at 15% inside the super fund; they do not reduce your taxable income for threshold purposes.

Do I need to lodge a tax return if I earned less than $18,200?

You may still need to lodge a tax return even if your income was below $18,200 — for example, if your employer withheld any tax, if you had multiple income sources, or if you operated a business. The ATO's 'Do I need to lodge?' tool at ato.gov.au gives a definitive answer for your specific situation.