Budget 2022: What will happen to the $1,080 tax cut?

Once the upcoming Federal Budget is handed down later this month, we'll know if the $1,080 tax offset will be extended or not. (Source: Getty)

For the past two years, low- and middle-income earners have paid $1,080 less tax than usual.

The low and middle income tax offset (LMITO) was never meant to be a permanent fixture and this year’s Budget could spell its end.

While not directly given as a tax refund, the $1,080 offset has meant eligible Aussies have paid less tax.

• Also read: $14,040 over four years: Tax cuts at centre of Frydenberg’s Budget

• Also read: $1,080 each: Tax cuts pass Parliament

• Also read: 90% of taxpayers could pay more this year

How it all began

The tax cut was first introduced by Scott Morrison in 2018 when he was still treasurer. It was introduced as the first step in a controversial multi-stage tax reform that will ultimately see an entire tax bracket abolished.

The LMITO was stage one in the three-part plan and was designed to give low- and middle-income earners immediate tax relief.

Stage two, due to be implemented 2022-23, will see the LMITO retired because other changes to the tax system would see low and middle income owners pay less tax.

In stage two, the 19 per cent tax rate will be expanded to include those earning up to $45,000, rather than $41,000. It will also see the low-income tax offset increased from $445 to $645.

Finally, in stage three, which is expected to start in 2024-25, a tax bracket will be abolished so taxpayers earning between $40,000 and $200,000 a year will face the same marginal tax rate of 30 per cent.

But the pandemic foiled these plans. In 2021, the Coalition agreed to extend the LMITO - initially due to expire in 2021-22 - at a cost of $7.8 billion.

By keeping the tax offset, the Government hoped to stimulate the COVID-affected economy by encouraging people to spend.

But could the election save the tax offset?

Treasurer Josh Frydenberg has already alluded to the expiry of the LMITO, pointing out that it was always a temporary instrument.

However, commentators have pointed out that taxing the offset will not be palatable for voters in the lead-up to a federal election and that both parties may consider tax cuts as an easy vote-winner.

So, even if the LMITO is scrapped, it’s possible there will be another sweetener for taxpayers this year.

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