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

Written 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).

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?

This table from the Australian Taxation Office gives a good at-a-glance overview of the 2018 -19 tax brackets and offsets:

RateFrom 1 July 2018 Income range ($)From 1 July 2022 Income range ($)From 1 July 2024 Income range ($)

Tax free

0–18,200

0–18,200

0–18,200

19%

18,201–37,000

18,201–41,000

18,201–41,000

32.5%

37,001–90,000

41,001–120,000

41,001–200,000

37%

90,001–180,000

120,001–180,000

45%

180,000+

180,000+

200,000+

NEW low- and middle-income tax offset

Up to 530

CURRENT low-income tax offset

Up to 445

NEW low-income tax offset

Up to 645

Up to 645

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? 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.

So what are the LITO and LMITO

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

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.

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 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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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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