A great place to start

How the new tax offsets can save you money this tax time

Shaun McGowan By Shaun McGowan
PITP. LITO. LMITO. Sound a lot like Disney or Pixar movie characters, don’t they?

But no...

...they all have something to do with taxation.

In the 2018-19 Budget, when he was still the Treasurer, Scott Morrison introduced the Personal Income Tax Plan (PITP) to cover the seven financial years up to the 2024-2025 year.

The plan included changes to tax thresholds and tax offsets to reduce the amount of personal income tax paid by low- and middle-income earners – including the introduction of the new Low to Middle-Income Tax Offset (LMITO) in addition to the Low-Income Tax Offset (LITO).


How the new tax offsets can save you money this tax time

While the changes are initially targeted at these low and middle income earners, high-income earners will also benefit from changes to the tax thresholds from 2022.

So what does all this mean for you?

Rate From 1st July 2018, Income Range From 1st July 2022, Income Range From 1st July 2024, Income Range
Tax Free up to $18,00
19% $18,201 – $37,000 $18,201 – $45,000
32.5%
From 1 July 2024, the 32.5% marginal tax rate will be reduced to 30%
$37,001 – $90,000 $41,001 – $120,000 $41,001 – $200,000
(with new 30% rate)
37% $90,001 – $180,000 $120,001 – $180,000 -
45% $180,001+ $200,001+
NEW low-and-middle-income tax offset Up to $1,080 - -
CURRENT low-income tax offset Up to $445 - -
NEW low-income tax offset - Up to $700

You’re probably pretty familiar with the concept of tax thresholds (if not, check out this article for a handy overview).

You may also already know about tax deductions – expenses you can claim to reduce the amount of income you have to pay tax on (e.g. donations to charity).

But you might well be wondering what offsets are, and what they mean to you?


Offsets can reduce the amount of tax you’ll have to pay

Well, like deductions, offsets can reduce the amount of tax you’ll have to pay. But they’re not the same.

Here’s how the government explains the difference:

  • Deductions, such as work-related-expenses, apply at the start of your tax return calculation to reduce your taxable income.
  • Tax offsets apply at the end of the tax return calculation, to directly reduce your tax liability.

Most offsets are ‘non-refundable’ – which means that you can only use them to reduce the amount of tax you have to pay.

So if, for example (and I’ve just plucked these numbers out of the air to explain the concept), you’re entitled to an offset of $500 but you only have $450 in tax to pay, you’ll reduce your tax liability to zero – but you won’t receive a credit for the $50 you didn’t use.


Tax Offset Example

So what are the LITO and LMITO

These are offsets that are only available to people who earn less than a certain amount.

You’ll find a handy ‘Guide to the Low- and Middle-Income Tax Offset (LMITO)’, with some practical examples to show who is eligible, in this article from SuperGuide in April 2019.

Now you may think the idea of an offset for people with low incomes is clear enough – and then you find out LITO and LMITO are separate beasts.

LMITO does not replace the LITO – in fact potentially, as a taxpayer, you could be eligible for both.

The good news is that when you file your tax return, the ATO will automatically check your eligibility for LITO and LMITO, and apply them to your assessment if appropriate. So if you’re eligible, you’ll automatically have your tax bill reduced.

The bad news is that from July 2022 (just when we’ll all have got our heads around it) everything will change again – there’ll be a reassessment of LITO thresholds and the LMITO will disappear.


Tax Offset - LIMTO

Meanwhile the Coalition have pledged significant income tax cuts for the coming years if they win the next election...

...while the Labor party want to scrap LITO and keep LMITO if they win the coming election – and claim they’ll provide ‘a bigger tax cut for 3.6 million Australians and an extra $1 billion for low-income earners.’

If you’re finding this all a bit confusing, you’re not alone!

An article published by 'Chartered Accountants Australia and New Zealand' in May 2018 attempts to explain the tax offsets to their membership.

It says, ‘Few clients understand tax offsets. But now many will be curious about their entitlement following the Federal Budget.’

They got that right!

If you’re feeling curious, confused, or simply want to get some idea of how much tax you can expect to pay this year, check out our new income tax calculator.

Conclusion

Whichever party holds power after 18 May 2019, there’ll still be tax offsets and changes to the income tax thresholds. How much of a reduction you can expect in your tax bill will just depend on how much you earn and which income brackets you hit!

It will still be complex, and there could be a lot more nuances depending on your specific circumstances, so unless you’re already a finance guru don’t just ignore it. Make sure you get professional advice when it’s time to file that tax return.

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