We all enjoy an extra boost in our tax refund, most recently from the low and middle income tax offset (LMITO) that helped boost refunds for millions of Aussie workers.
The government introduced LMITO in the 2018-19 tax year and increased in value in 2021-22 with an additional “cost of living tax offset”.
Unfortunately, the end has come for LMITO. The offset will no longer be available from the 2022-23 tax year (1 July 2022 – 30 June 2023).
Don’t worry, this won’t affect your paycheck each month, but if you previously benefitted from this tax offset, the end of LMITO ultimately means you will pay more tax overall, and you’re likely to receive a smaller tax refund at tax time. So, let’s dig into what the end of LMITO will mean for you.
What is the Low and Middle Income Tax Offset?
The low and middle income tax offset is a reduction of your tax payable and it was sort of a gift from the Australian Government. It was introduced as part of the federal budget for 2018-19, aiming to provide some relief to low and middle income earners by reducing the amount of tax they pay each year. This also helped to balance a tax bracket creep problem that has been growing in Australia, forcing workers into higher tax even when their standard of living didn’t improve.
It’s important to note that the tax offset did not affect any HELP/HECS debt.
Who got LMITO and how much did it ‘pay’?
Between the 2018-19 and 2021-22 financial years, if you were an Australian resident for tax purposes and received an income of less than $126,000 per year, you could claim the LMITO for those years.
Contrary to popular belief, you don’t receive the amount of the LMITO offset directly as a lump sum or even a cash payment. Because it is an offset, it can only reduce the amount of tax you need to have paid at the end of the financial year. If you didn’t pay tax, you’re not entitled to the offset. But if you did pay tax, the offset probably boosted your tax refund, by quite a lot, during recent years.
|$0 – $37,000||$255|
|$37,001 – $48,000||$255 + 7.5 cents for every dollar over $37,000, up to $1,080 maximum|
|$48,001 – $90,000||$1,080|
|$90,001 – $126,000||$1,080 – 3 cents for every dollar above $90,000|
During the 2021-22 income year, taxpayers who earned under $126,000 were entitled to an additional $420 tax offset. This was on top of what is outlined in our table above.
Example of how LMITO affects a normal Australian worker
From 1 July 2021 – 30 June 2022, Chantel’s income was $62,000. Throughout the year her employer deducted $10,617 in tax from her pay, and sent that money to the ATO.
Given that Chantel’s taxable income falls between $48,000 and $90,000, she is eligible to the $1,080 and $420 offsets. This brings her tax payable down to $9,117. But, remember that she paid $10,617. The difference of $1500 boosted Chantel’s tax refund way up.
How will the end of LMITO affect my tax refund?
If you complete a tax return for a year prior to 2023, you don’t need to do anything. The LMITO is and was applied in your Etax return automatically, reducing your tax payable, and increasing your tax refund. However…
Is the tax offset scrapped for 2023?
For the 2022-23 income year (1 July 2022 – 30 June 2023), the low and middle income tax offset is no longer available. This means that your tax payable will be calculated at the full amount, without any reduction applied. Therefore, millions of Australians who received the offset and got bigger tax refunds in 2020, 2021 and 2022 will now pay more tax than they have in previous years.
In a nutshell: The end of the tax offset called LMITO means many Australian workers will get smaller tax refunds in 2023. And there’s nothing we can do about that.
At the same time, the upcoming income tax rate changes provide tax breaks for Australia’s highest income earners. That’s known as Stage 3 Tax Cuts.
What about the Low Income Tax Offset (LITO)? Is LITO the same as LMITO?
The LITO is a tax offset available to Australian residents who earn less than $66,667 per year. The offset reduces the amount of tax payable by a maximum of $700 for individuals who earn less than $37,500 per year. For taxpayers earning between $37,501 and $45,000 per year, the offset reduces depending on your income. A minimum offset of $255 is available to those earning between $45,001 and $66,667.
The good news for low income earners is that the low income tax offset (LITO) will continue. There have been no announced changes to this offset.
It’s important to note, the offset can only reduce tax payable to nil – any excess offset is not refundable. Plus, instead of paying the LITO as a refund, it may be used to reduce any outstanding debt you might have with the ATO.
What do you need to do at tax time?
Nothing! Your Etax tax return will automatically assess your income and apply any ATO tax offset you are entitled to, adjusted for the year’s tax return you are completing.