The 2022 Budget threw in a few perks for businesses but the one that around 10 million taxpayers will appreciate, is the decision to increase the tax offset for low and middle income earners.
The Low and Middle Income Tax Offset, often referred to as the LMITO, has been increased for the 2021-2022 income year with the addition of “cost of living tax offset”.
What do the tax cuts mean and what is a tax offset?
First, let’s be clear… while the media is reporting these as tax cuts for 2022, what’s actually happening is an increase 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 $1,080 tax offset plus an additional $420 cost of living tax offset.
- So your tax payable is reduced from $18,742 to $17,242 – effectively giving an additional refund of $1,500.
What is the Low and Middle Income Tax Offset (LMITO)?
The LMITO is a tax offset of up to $1,500 (for the 2022 income year). 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.
In 2022 to address the rise in the cost of living the Government introduced a “cost of living tax offset” of up to $420 for those eligible.
This increase applies only to 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 2022?
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, as a result of 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 + $420
- Between $37,000 and $48,000 = $255 + 7.5% of the amount over $37,000 + $420
- Earn between $48,000 and $90,000 = $1080 + $420
- Between $90,000 and $126,000 = $1080 less 3% of the amount over $90,000 + $420
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 or the additional $420 as a lump sum payment.
What do I need to do to claim the LMITO in 2022?
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 automatically includes any offsets you’re entitled to into the refund estimate. How easy is that?
What happens to the LMITO in 2023?
With the LMITO confirmed to be ending on 30 June 2022, millions of Aussies will find themselves paying more tax than the previous financial year.
Middle income earners will no longer be receiving the $1,500 offset and ultimately pay more tax than they have in previous years.
If you have any questions about tax cuts or anything else regarding your tax return, please get in touch.