There was something to make low and middle income Aussies smile in the budget again this year. Tax cuts are staying – for now!
The 2021 Budget threw in a few perks for businesses but the one that around 10 million taxpayers will appreciate, is the decision to continue the tax offset for low and middle income earners.
Due to finish on July 30 this year, the Low and Middle Income Tax Offset, often referred to as the LMITO, is set to stay for another year..
What is a tax offset?
First, let’s be clear… while the media is reporting these as tax cuts for 2021, what’s actually happening is an extension of an existing tax offset. So, let’s cover what a tax offset actually is.
A tax offset, is a reduction of your tax payable by the offset amount. It can only reduce tax payable to nil though – any excess offset is not refundable.
Contrary to popular belief, you don’t receive the amount of the offset entitlement directly as a lump sum.
Let’s explain that:
- If you earn $87,000 a year, in the 2021/22 financial year you are eligible for a $1080 tax offset, so your tax payable is reduced from $18742 to $17662 – effectively giving an additional refund of $1080.
What is the Low and Middle Income Tax Offset (LMITO)?
The LMITO is a tax offset of up to $1,080. Originally introduced as an offset of $540 in Stage 1 of the Government’s larger Personal Income Tax Plan, Stage 2, which started on 1 July 2020, saw the tax offset increase to $1,080.
This is also where we saw some tax cuts for middle income earners in the form of expanding the 32.5% tax bracket to include incomes of up to $120,000, up from $90,000.
While the LMITO was slated to end on 30 June 2021, the economic fallout of the Pandemic led to the Federal Government extending the offset for another year.
As announced in the 2021 Budget, the LMITO extension now includes the 2021/22 financial year and is scheduled to end on 30 June 2022.
Am I eligible for the tax cuts or the LMITO in 2021?
If you’re an Australian resident for tax purposes and earn up to $126,000, you are eligible for the LMITO.
The amount of LMITO you receive varies depending on your income. More on that below…
How much do I get this year?
As we clarified earlier, you won’t actually receive a lump sum. The offset reduces your tax payable. But that’s still good news, you may see a little extra in your tax refund this year. This is due to the reduction in tax that you’re required to pay this year.
It’s important to note, if you have an outstanding debt with the ATO, any refund which includes the LMITO may be used to reduce that debt rather than paid to you as a refund. Any HELP/HECS debt remains unaffected by these cuts.
The tax cut you receive depends on your total taxable income for the year, as follows:
- Less than $37,000 per year = $255
- Between $37,000 and $48,000 = $255 + 7.5% of the amount over $37,000
- Earn between $48,000 and $90,000 = $1080
- Between $90,000 and $126,000 = $1080 less 3% of the amount over $90,000
One other important point to clarify, the LMITO is not a refund. This means that if you have not paid tax during the year, you cannot receive it. For example, if you earned $20,000 last year but didn’t pay any tax you won’t receive the $255 as a lump sum payment.
What do I need to do to claim the 2021-22 tax cuts?
Thankfully, you don’t need to work out anything – or do anything differently at tax time.
All you need to do is lodge your tax return as usual at Etax.com.au. Our clever IT team have built the tax cuts and the low and middle offset right into our calculator. It will automatically include any offsets you’re entitled to into the refund estimate you see on screen. How easy is that?
If you have any questions about tax cuts or anything else regarding your tax return, please get in touch.