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Low Income Tax Offset (LITO): How it works

If you earn less than $37,500 this financial year the good news is that you could be entitled to claw back $700 in tax you would otherwise pay, thanks to the Low Income Tax Offset, or LITO. Even if you earn more, you may still be eligible for some LITO. And let’s face it, these days every cent helps.

The $700 Low Income Tax Offset (LITO), combined with the tax-free threshold of $18,200, effectively allows working Australians to earn up to $21,884 for the 2022–23 financial year before they need to pay any income tax or Medicare Levy.

Because it’s a non-refundable tax offset, it can only be used to lower the amount of tax you owe. It can’t be received as a tax refund or used to pay your Medicare levy.


Note

Tax offsets are different to tax deductions, although both reduce the amount of tax you pay. Tax deductions such as work expenses reduce your taxable income. Offsets are then deducted from your tax liability.


Who is eligible for LITO?

Your eligibility for LITO depends on your taxable income. If you earn less than $66,667 you’ll get some LITO. If you earn $37,500 or less you’ll get the full LITO of $700. This amount reduces by 5 cents for each dollar earned over $37,500, and then by 1.5 cents for every dollar over $45,000.

If you’re eligible for the LITO, you don’t need to do anything. The Australian Taxation Office (ATO) will apply the offset when you lodge your tax return.

LITO income thresholds

The table below shows the income thresholds, covering the 2020–21 year onwards.

IncomeLITO amount
$37,500 or less$700
$37,501 – $45,000$700 minus ((Taxable Income minus $37,500) x 5%)
$45,001 – $66,667$325 minus ((Taxable Income minus $45,000) x 1.5%)
More than $66,667Nil

Try our income tax calculator to understand the offsets and levies that may apply to you, plus your effective tax rate.

Examples of how LITO is applied

The following examples show how the ATO applies the LITO.


Example 1

Howard’s taxable income for the 2022–23 income year is $20,542. Because Howard’s income is less than $37,000, he gets $700 in LITO.

The ATO works out the tax he needs to pay as follows:

  • $20,542 – $18,200 (tax free threshold) = $2,342
  • $2,342 x 19% (his marginal tax rate) = $445
  • $445 less $700 (LITO) = $0

Because Howard’s income is low, he won’t pay any tax. However, LITO can only reduce his tax bill to $0; he can’t receive a refund of unused LITO amounts.

He also doesn’t need to pay the Medicare levy because he is within the Medicare levy low income threshold.


Example 2

Caylan is 15 years old and an Australian resident. She has $19,200 of excepted income and $4,000 in other income.

The ATO will take the following steps to work out how much tax Caylan has to pay for the 2022–23 year.

Tax on excepted income

  • $19,200 (excepted income) less $18,200 (tax-free threshold) = $1,000
  • $1,000 × 19% (tax rate) = $190
  • $190 (tax payable) less $700 (LITO) = $0

Because Caylan’s taxable excepted income is less than $37,000, she can get the maximum rate of LITO of $700. However, the offset will only reduce her tax payable on excepted income of $190 to $0. So Caylan will not have to pay tax on her excepted income.

Tax on other income

  • $4,000 (other income) × 45% (tax rate) = $1,800.

Because Caylan’s other income is over $1,307, the total amount of $4,000 is taxed at 45%.

LITO can’t be used to lower the tax Caylan has to pay on her other income. This means she needs to pay $1,800 in tax.

Caylan’s total tax payable is therefore $1,800.


LITO and minors (people under 18)

There are different rules when applying LITO for people under 18. LITO does not apply to unearned income that people under 18 may receive, such as income from a family trust.

The reason for this is that the ATO does not want parents to pass their earnings to their children without paying the correct tax.

Thresholds and rates for unearned income of minors

IncomeTax rates
$0 – $416Nil
$417 – $1,30766% of excess over $416
More than $1,30745% on the total amount of income that is not excepted income

When the rates don’t apply

There are some situations where these rates don’t apply. These can be due to a situation the person is in or the type of income. When this happens, the ATO taxes a person under 18 at the adult tax rate and gives them access to the tax-free threshold of $18,200.

Types of incomes the rates don’t apply to

These tax rates don’t apply to the following types of income:

  • Employment
  • Taxable pensions or payment from Centrelink or the Department of Veteran’s Affairs
  • Compensation, superannuation or pension fund benefits
  • A deceased estate
  • Property transferred to the person on the death of another person or family breakdown
  • Damages for personal injury
  • Business income
  • Income from a partnership where the person was an active partner

Situations where these rates don’t apply

If a person under 18 (minor) meets any of the following conditions, they will not have to pay the higher rates of tax:

  • They were working full time
  • They had worked full time for three months or more in the current year and are intending to work full time for most or all of the next year and not intending to study full time in the next year
  • They were able to get disability support pension or rehabilitation allowance, or someone was able to get a carer allowance to care for them
  • They were permanently blind
  • They were disabled and were likely to suffer from that disability permanently or for an extended period
  • They were entitled to a double orphan pension and got little or no financial support from relatives
  • They were unable to work full time because of a permanent mental or physical disability and got little or no financial support from relatives.

Don’t confuse LITO with LMITO or LISTO

Superannuation and tax have many acronyms, and it’s easy to confuse LITO with LMITO (Low and Middle Income Tax Offset) or LISTO (Low Income Superannuation Tax Offset).

  • LMITO was a temporary tax offset applying between 1 July 2018 and 30 June 2022.
  • LISTO is a refund of superannuation contributions tax payable by low-income taxpayers. For more information see SuperGuide article How LISTO works (Low Income Superannuation Tax Offset).

Disclaimer: The contents of this article are for the purposes of providing general information only. You should seek appropriate advice from a licensed tax professional or financial planner to determine your tax positon.


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