Yahoo Finance Warning over $1,080 tax rise hidden in the Budget
Treasurer Josh Frydenberg announced an additional $420 tax offset in last night’s Budget but experts have warned this will actually turn into a tax rise.
Director of tax communications at H&R Block Mark Chapman said, while the expansion of the low and middle income tax offset (LMITO) was welcome this year, it will turn around next year.
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“Unfortunately, this is just a short-term measure. Next year, the LMITO disappears completely - meaning that people earning up to $126,000 will see a tax rise of up to $1,080,” Chapman said.
“It's hard to see how that will do anything to help cost-of-living pressures over the medium and long term.
“Worse, just as most Australians will see this tax rise, the wealthiest Australians will be anticipating a tax cut of up to $9,075 in 2024-25.”
What is the LMITO?
Around 10 million Aussies will get an extra $420 worth of tax relief this financial year as part of the Government's efforts to offset the rising cost of living.
Currently, the LMITO gives those eligible an offset between $255 and $1,080 come tax time, but that will increase to between $675 and $1,500 from July 1.
When you lodge your tax return the ATO will automatically give the offset against the tax you owe that year and reducing the amount you have to pay.
"The offset cannot exceed the total amount of tax due (ignoring PAYG instalments, etc) for the year," Chapman said.
If your taxable income is up to $126,000, you will get some or all of the expanded low- and middle-income tax offset.
Basically, if your income is less than $37,000, you will pay $675 less tax. If your income is between $37,001 and $48,000, the tax offset will increase steadily to $1,500.
Between $48,000 and $90,000, you will pay $1,500 less tax.
If you earn more than $90,000, and the offset gradually phases out, disappearing after $126,000.
So, if you earn $126,000, you will pay $420 less tax but if you earn $126,001, you won’t benefit from the offset at all.
This doesn’t mean you get cash back. It just means the amount you owe the Government in tax will be reduced.
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 would ultimately see an entire tax bracket abolished so taxpayers earning between $40,000 and $200,000 a year would face the same marginal tax rate of 30 per cent.
The LMITO was stage one in the three-part plan and was designed to give low- and middle-income earners immediate tax relief.
It was initially meant to be abolished before stage two because other changes to the tax system would see low- and middle-income earners pay less tax, cancelling out the tax relief created by LMITO.
But the pandemic threw these plans off course. In 2021, the Coalition agreed to extend the LMITO to help stimulate the economy during COVID.
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