The Tax Free Threshold (TFT) is an important concept to understand when it comes to filing taxes. This threshold is a dollar amount that determines how much income is exempt from taxation. By claiming the TFT, taxpayers can reduce the amount of tax they owe on their taxable income. However, not claiming the TFT can have serious consequences.
Understanding the Tax Free Threshold
The TFT is a dollar amount set by the government that determines how much income is exempt from taxation. In Australia, the TFT for the 2020-21 financial year is $18,200. This means that any income earned below this amount is not subject to tax. For example, if a taxpayer earns $17,000 in a year, they will not have to pay any tax on this income.
In addition to the TFT, taxpayers may also be eligible to claim other tax-free benefits such as the Low Income Tax Offset (LITO). This offset can reduce the amount of tax a taxpayer owes on their taxable income.
Consequences of Not Claiming
If a taxpayer chooses not to claim the TFT, they will be liable to pay tax on their entire taxable income. This means that even if a taxpayer earns less than the TFT, they will still have to pay tax on their income. This can significantly increase the amount of tax they owe.
In addition, taxpayers who do not claim the TFT may be subject to a tax penalty. The Australian Taxation Office (ATO) may impose a penalty if it finds that a taxpayer has not claimed the TFT when they were eligible to do so. The amount of the penalty will depend on the amount of tax the taxpayer owes.
Finally, taxpayers who do not claim the TFT may also miss out on other tax benefits. For example, they may not be eligible for the Low Income Tax Offset or other tax offsets.
Claiming the Tax Free Threshold is an important part of filing taxes. By claiming the TFT, taxpayers can reduce the amount of tax they owe on their taxable income. However, not claiming the TFT can have serious consequences. Taxpayers who do not claim the TFT may be liable to pay tax on their entire taxable income, may be subject to a tax penalty, and may miss out on other tax benefits. It is important to understand the TFT and to make sure to claim it when filing taxes.
Almost everyone who receives salary and wage income must pay income tax, but the Australian Taxation Office (ATO) has created a tax-free threshold to allow taxpayers to have some of their income withheld dollar for dollar. However, it is important to remember that every individual has the option to either claim or not claim the tax-free threshold.
If you choose not to claim the tax-free threshold, the ATO will withhold the maximum rate of tax from your income during each payday. This means that you may be paying more in taxes over the course of the financial year and risk getting a lower tax refund than you anticipated. This is because the tax-free threshold provides a reduced rate of tax withholding, allowing you to keep more of your income during the course of the year.
For example, if you earn $50,000 per year and choose not to claim the tax-free threshold, you may end up paying an extra $1050. Your income tax return would also be impacted, as your tax liability would be higher than if you had claimed the tax-free threshold. On the other hand, if you had claimed the tax-free threshold, you would have paid only $2550 for the same amount of income. This means that you may be able to get a larger refund at the end of the financial year.
When deciding whether or not to claim the tax-free threshold, it is important to consider the short and long-term implications of the decision. It is a good idea to talk to a tax advisor or accountant to discuss your own circumstances and make the best decision. Not claiming the tax-free threshold may give you more money to spend during the year, but can also leave you with a hefty tax bill and lower refund when filing your income tax return.
Ultimately, claiming the tax-free threshold is a personal decision, but one that should be taken into consideration as it can lead to a larger income tax return, minimising your tax bill for the year.