The Tax-Free Threshold Explained

A Comprehensive Guide for Micro and Small Businesses

Understanding tax is a critical part of running a small business. One of the key elements that our clients often ask about in tax discussions is the tax-free threshold. But what exactly is it, and how does it apply to you as a small business owner? Let's dive in.

What is the Tax-Free Threshold?

The tax-free threshold refers to an amount set by the government that an individual can earn each financial year without being required to pay income tax on it. If you are an Australian resident taxpayer, the first $18,200 of income you receive in a financial year is tax-free. This is known as the tax-free threshold.

How Does It Apply to Your Business?

If you're a sole trader, the tax-free threshold applies directly to you. For example, if you earn $20,000 in a year as a sole trader, and this is your only income, then you pay tax on the $1,800 of profit over the tax-free threshold.

For small businesses structured as companies, the tax-free threshold doesn't apply in the same way. Companies aren't eligible for the tax-free threshold and must pay tax on every dollar earned. However, company directors and employees, who are individuals, still have access to the tax-free threshold for their personal income.

Maximising the Benefit of the Tax-Free Threshold

To make the most of the tax-free threshold, it's crucial to understand when and how it applies to you. Remember, if you have more than one job, you should usually claim the tax-free threshold from the employer who pays you the highest wage.

A Word of Caution

While the tax-free threshold can help reduce your tax liability, it's important to remember that earning above the threshold isn't necessarily a bad thing. Earning more means your business is growing, which is always a positive outcome. The key is to understand your tax obligations and plan accordingly.

At Numeric Accounting & Advisory, we know that understanding tax concepts like the tax-free threshold can be daunting. That's why we're dedicated to providing clear, easy-to-understand advice tailored to your unique business needs.

In conclusion, the tax-free threshold is an important aspect of the Australian tax system that can significantly impact your tax obligations. By understanding what it is and how it works, you can better manage your business finances and potentially save on taxes.

If you have any questions about the tax-free threshold or any other tax-related matters, don't hesitate to get in touch with us at Numeric Accounting & Advisory. Our team is ready to assist you with personalised advice and proactive strategies to help you navigate your tax obligations effectively and keep your business thriving.