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Tax-free threshold when you have income form two sources and changing jobs during the year. – article by Skye Lee

 

How tax is withheld if you are paid by two or more payers at the same time. For example:

  • You work four days a week for one employer and one day a week for another employer.
  • You receive a taxable pension and also have a regular part time job.
  • You receive a taxable Australian Government allowance or payment and also have a regular part time job.

Calculating the amount of tax to be withheld

Tax-free threshold

If you are an Australian resident for taxation purposes, the first $18,200 of your yearly income is not taxed. This is called the tax-free threshold. If you have more than one payer at the same time, we generally require that you only claim the tax-free threshold from the payer who usually pays the highest salary or wage (this is known as your primary source of income).  If you earn additional income (for example, from a second job or a taxable pension) your second payer is required to withhold tax at the higher, ‘no tax free threshold’ rate.

If your second payer does not withhold a higher rate of tax this may lead to a tax debt at the end of the financial year.

However, if you are certain your total income for the year will be less than $18,200 you can claim the tax-free threshold from each payer.

The tax-free threshold increased from $6,000 to $18,200 on 1 July 2012. If you have claimed the tax free threshold from more than one payer, you will need to provide a new withholding declaration to one of your payers if your total income increases to be above $18,200.

 

Withholding tax tables

Your employer or payer uses tax tables to work out how much tax to withhold from your payment.

In most cases, where you have income from one payer, the amounts withheld will be sufficient to cover the tax payable on your payments at the end of the financial year.

When a person has more than one job or payer, the total tax withheld from all sources may result in too much tax being withheld (that is, over-withholding) or insufficient tax being withheld (that is, under-withholding).

Examples and what you can do

Example 1: Over-withholding and yearly income less than $18,200

Jeff has a taxable pension of $384.61 per fortnight ($10,000 for the year) and also a part time job earning $307.69 per fortnight ($8,000 for the year).

Jeff claims the tax-free threshold on his pension and no tax is withheld during the year.

If Jeff does not claim the tax-free threshold through his employer for his part-time job, $66 per fortnight would be withheld and the total tax withheld from Jeff’s payments during the year would be $1,716.

Assuming that Jeff does not have other income, Jeff’s tax payable at the end of the financial year would be nil. He would receive a refund of the total tax withheld of $1,716.

In this case, Jeff could also claim the tax-free threshold for his part time job through his employer so that no tax is withheld from payments made to him throughout the year. This can be done by completing a withholding declaration.

Example 2: Over-withholding and yearly income more than $18,200

Sue has two jobs. As a part time retail sales assistant she earns $538.46 per fortnight ($14,000 for the year). She also works in a restaurant earning $384.62 per fortnight ($10,000 for the year).

Sue claims the tax-free threshold from her retail employer and has no tax withheld.

If Sue does not claim the tax-free threshold from her restaurant employer, $82 per fortnight would be withheld and the total tax withheld from Sue’s payments during the year would be $2,132.

Assuming that Sue does not have other income, her tax payable when she lodges her return would be:

Taxable income: $24,000
Income tax payable on $24,000 $1,102
Less
Low income tax offset
$445
$657
Plus
Medicare levy (10% of income over $20,542)
$345.80
Total tax and Medicare levy $1,002.80
Credit for total tax withheld (26 x $82) $2,132.00
Refund due $1,129.20

The refund of $1,129.20 arises due to Sue having over-withholding on payments she received from her employers during the year. Sue can apply to the ATO to arrange for a withholding variation to reduce the over-withholding so that she receives extra net pay during the year, rather than a large tax refund at the end of the financial year.

Example 3: Under-withholding

Pierre receives a taxable pension and is employed in a part-time job. Over the course of the 2012-13, year, he receives:

    • $30,000 from the pension, and
    • $30,000 from the part-time job.

Pierre is paid fortnightly.

Using the Pay as you go (PAYG) withholding Schedule 3 – Fortnightly tax table and applying the Medicare levy and tax-free threshold to the first job and Medicare levy and no tax-free threshold to the part-time job, the tax withheld is:

Annual income Fortnightly income Fortnightly Tax withheld
Pension $30,000 $1,153.84 $102.00
Part-time job $30,000 $1,153.84 $306.00
Total $60,000 $2,307.68 $408.00

At the end of the financial year if Pierre continues to have tax withheld of $408.00 each fortnight, he will have paid a total of $10,608 in income tax ($408 x 26 fortnights).

When Pierre lodges his tax return for the year, the actual amount of income tax that he will have to pay will be:

Taxable income: $60,000
Income tax payable on $60,000 $11,047
Less
Low income tax offset
$100
$10,947
Plus
Medicare levy (1.5% of $60,000)
$900
Total tax and Medicare levy $11,847
Credit for Total tax withheld (26 x $408) $10,608
Tax payable $1,239

Pierre will have tax debt of $1,239 as insufficient tax was withheld during the year on payments he received from his pension fund and employer.

Pierre can choose to ask one or both of his payers to withhold extra tax to cover the shortfall, by supplying them with a completed Withholding declaration – upwards variation. Alternatively, he can put money aside to ensure that he can pay his tax bill when it falls due.

 

Posted in Tax
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