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Note: In the 2019 Federal Budget the coalition government proposed increasing the LITO rate from 1 July 2022. This has now been legislated.
The Low Income Tax Offset (LITO), combined with the tax-free threshold of $18,200, effectively allows working Australians to earn up to $20,452 before they need to pay any income tax.
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.
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’s 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 $37,000 or less you’ll get the full LITO of $445. This amount reduces by 1.5c for each dollar earned over $37,000.
If you’re eligible for the LITO, you don’t need to do anything. The Australian Taxation Office (ATO) will apply the offset, as well as the Low and Middle Income Tax Offset (LMITO), when you lodge your tax return.
LITO income thresholds
These are the current income thresholds, covering the 2018/19, 2019/20, 2020/21 and 2021/22 years.
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|$37,000 or less||$445|
|$37,001 – $66,667||$445 less ((Taxable Income minus $37,000) x 1.5%)|
|More than $66,667||Nil|
The following examples show how the ATO applies the LITO.
Howard’s taxable income for the 2019/20 income year is $20,542. Because Howard’s income is less than $37,000, he gets $445 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 $445 (LITO) = $0
Because Howard’s income is low, he won’t pay any tax. He also doesn’t need to pay the Medicare levy because he is within the Medicare levy low income threshold.
LITO amounts from 2022/23 onwards
From 1 July 2022, new thresholds and rates will apply for the LITO.
The LITO changes announced in the 2019 Federal Budget and passed through the senate on 4 July 2019 are as follows:
|Income for the 2022/23 and later income years||New Low Income Tax Offset amount|
|$37,500 or less||$700|
|$37,501 – $45,000||$700, less 5% of the income that exceeds $37,500|
|$45,001 – $66,667||$325, less an amount equal to 1.5% of the income that exceeds $45,000|
LITO amounts from previous years
|Financial years||Maximum offset||Full entitlement||Effective tax-free threshold||Phasing-out rule|
|2012/13 to 2018/19||$445||Income $37,000 or below||$20,542||$37,000 – $66,667|
|2011/12||$1,500||Income $30,000 or below||$16,000||$30,001 – $67,500|
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
|$0 – $416||Nil|
|$417 – $1,307||66%|
|More than $1,307||45% 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 due to their 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
Excepted income includes income from:
- 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 as a result of 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 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.
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.
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 $445 (ITO) = $0
Because Caylan’s taxable excepted income is less than $37,000, she can get the maximum rate of LITO of $445. 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 $1307, 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.
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).
- LAMITO is a new temporary tax offset applying between 1 July 2018 and 30 June 2022. For more information see SuperGuide article Guide to the Low and Middle Income Tax Offset (LMITO)
- LISTO is a refund of superannuation contributions tax payable by low-income taxpayers. For more information see SuperGuide article Superannuation tax refund: 10 things to know about LISTO.
Disclaimer: The contents of this article are for the purposes of providing general information only. Persons should seek appropriate advice from a licensed financial planner before undertaking any investments or strategies with respect to their superannuation interests.
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