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

For the 2025 financial year, the effective tax-free threshold for most resident individuals is $22,575. While the official threshold is $18,200, the Low Income Tax Offset (LITO) effectively increases this amount, meaning you pay no tax on incomes up to $22,575.

Why isn't the tax-free threshold $18,200?

The $18,200 figure is the legislated tax-free threshold, but it doesn't account for tax offsets. The Low Income Tax Offset (LITO) is a non-refundable tax credit that reduces the tax payable for low to middle-income earners. It is designed to ensure that low-income earners pay little to no tax, raising the effective tax-free threshold significantly higher than the widely-quoted $18,200.

How does the Low Income Tax Offset (LITO) work?

The LITO is automatically calculated by the ATO when you lodge your tax return. It provides a maximum tax offset of $700 for those earning up to $37,500. This offset directly reduces the amount of tax you owe. At an income of $22,575, the LITO of $700 perfectly cancels out the tax liability, resulting in zero tax payable.

The Real Tax-Free Threshold in Australia (It's Not $18,200)

Did you know that Australia's headline tax-free threshold has been stuck at $18,200 since 2013? Despite years of inflation and major tax reforms, that number has remained unchanged.

It's no wonder so many people aim to reduce their taxable income to this figure, mistakenly thinking it’s the most effective way to pay zero tax.

But I'm here to tell you that $18,200 is not the magic number. You can have a higher taxable income and still pay nothing to the ATO. More importantly, I'm going to show you with three real-life examples how changing your perspective on this can significantly improve your finances.

The Tax-Free Threshold: Myth vs. Reality (FY25)

The Myth: The tax-free threshold is $18,200.
The Reality: The effective tax-free threshold is actually $22,575.
The Reason: The Low Income Tax Offset (LITO) of $700 automatically cancels out the tax payable on incomes up to this amount.
The Benefit: Knowing this allows for more precise tax planning, preventing you from over-contributing to super or making unnecessary deductions.

The $18,200 Myth: What is the Real Tax-Free Threshold?

So, if $18,200 isn't the number, what is? Let's find out.

Taxable income of $21,000? Zero tax.
Taxable income of $22,000? Still zero tax.
Taxable income of $22,576? You pay a little bit of tax.
Taxable income of $22,575? Zero tax.

We've found the magic number. For the 2025 financial year, the effective tax-free threshold for most Australian residents is $22,575.

The reason for this is a key player in our tax system: the Low Income Tax Offset (LITO). At this level of taxable income, the $700 LITO perfectly cancels out the amount of personal income tax you would otherwise owe, which is calculated using the standard income tax rates. This is all calculated automatically by the ATO when you lodge your return.

It's important to note that if you are also eligible for the Seniors and Pensioners Tax Offset (SAPTO), your effective tax-free threshold will be even higher.

How Knowing the "Magic Number" Can Improve Your Finances: 3 Examples

This isn't just a fun piece of trivia; knowing the correct threshold can lead to smarter financial decisions. Let's look at three people with the same goal: to minimise their tax.

Disclaimer: This information is for educational purposes only and is not financial advice. Your situation might be different, so it's crucial to do your own research or consult a professional.

Example 1: The University Student (John)

John is juggling his studies with a part-time job. The old John, who still believed that $18,200 was the tax-free threshold, might have felt pressured to find $4,800 worth of deductions to pay zero tax. Have you ever spent money on something you didn't really need just because it was tax-deductible? Now, all John needs to find is $425 worth of deductions. Easy peasy.

Example 2: The First Home Buyer (Jenny)

Jenny is saving for her first home and wants to use the First Home Super Saver Scheme (FHSSS) to help. After her usual work-related deductions, she plans to make a personal deductible super contribution to bring her taxable income down to the tax-free threshold.

If she aimed for the old $18,200 threshold: She would need to contribute $18,800 to her super.
Knowing the real $22,575 threshold: She only needs to contribute $14,425.

Why does this matter so much? The FHSSS only permits the release of up to $15,000 of voluntary contributions from any one financial year. If Jenny had mistakenly contributed the larger amount, the extra $3,800 would have been effectively locked away in her super, inaccessible until retirement. By knowing the real threshold, she contributes the optimal amount and keeps her savings accessible.

Example 3: The Retiree with a Capital Gain (Dennis)

Dennis sold an investment property and has a large capital gain, resulting in a taxable income of $180,700. He is eligible to use the "carry-forward" super contribution rule to make a large personal deductible super contribution and reduce this taxable income.

If he aimed for the old $18,200 threshold: He might be tempted to use up all his available carry-forward cap and contribute $162,500.
Knowing the real $22,575 threshold: He knows he only needs to contribute $158,125 to bring his taxable income down to the magic number and pay zero tax.

By contributing only what is necessary, Dennis avoids two mistakes. First, the extra $4,375 he would have contributed would attract 15% super contributions tax without providing any extra personal tax reduction. Second, he preserves that unused portion of his contribution cap, giving him the opportunity to use it to lower his taxable income in a future year if needed.

A Simple and Powerful Lesson

You don't want to make that mistake. Understanding this simple but powerful piece of tax knowledge can help you make smarter decisions and keep more of your hard-earned money.