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Note: In the 2019 Federal Budget the coalition government proposed increasing the LMITO from the 2018/19 financial year. This is now law and applies for 2018/19 and 2019/20 tax returns.
Now that the Low and Middle Income Tax Offset (LMITO) has become law, you may be eligible for a tax offset of up to $1,080, depending on your income.
LMITO helps low and middle-income earners reduce the amount of tax they pay. Because it’s a tax offset, it can only be used to lower your tax bill and can’t be used to generate a tax refund or 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.
LMITO was designed as a temporary measure for the four financial years between 1 July 2018 and 30 June 2022. From 1 July 2022 the Low Income Tax Offset (LITO) will be increased and the 32.5% tax bracket will be expanded from incomes of up to $90,000 to income of up to $120,000. This will supplant the need for LMITO, which will be rolled into the existing LITO.
Who’s eligible for LMITO
Your eligibility for LMITO depends on your taxable income. You’re eligible for some LMITO if your taxable income is at or below $126,000. There’s no need to apply for it, the ATO will work out if you’re eligible when they assess your tax return.
The government estimates that 4.5 million Australian taxpayers will be eligible for the full LMITO of $1,080, while another 5.6 million will receive a partial.
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LMITO income thresholds
These LMITO thresholds apply for the 2018/19, 2019/20, 2020/21 and 2021/22 years.
|$37,000 or less||Up to $255|
|$37,001 – $48,000||$255 plus 7.5% of the portion of your taxable income that exceeds $37,000|
|$48,001 – $90,000||$1,080|
|$90,001 – $126,000||$1,080 less 3% of the portion of your taxable income that exceeds $90,000|
The maximum available LMITO is $1,080 for taxpayers with taxable incomes between $48,000 and $90,000.
The following examples show how the ATO applies the LMITO.
Jane works part time and will earn a taxable income of $30,000 for the 2019/20 financial year. She’ll be entitled to a partial LMITO of $255.
Mitchell will earn a taxable income of $45,000 this financial year. His LMITO will be calculated as follows:
$255 + (7.5% x ($45,000 – $37,000))
= $255 + (7.5% x $8,000)
= $255 + $600
Mitchell will therefore be entitled to a partial LMITO of $855.
Amy will earn a taxable income of $110,000 this financial year. Her LMITO will be calculated as follows:
$1,080 – (3% x ($110,000 – $90,000))
= $1,080 – (3% x $20,000)
= $1,080 – $600
Amy will therefore be entitled to a partial LMITO of $480.
Does LMITO replace the Low Income Tax Offset (LITO)?
No, the Low Income Tax Offset (LITO) will continue to apply in addition to LMITO for the four years that LMITO is in operation. Income thresholds and the offset amount available under LITO are scheduled to be adjusted/increased for the 2022/23 financial year (when the LMITO ceases). These adjustments are intended to lock in the LMITO tax cuts under the single LITO banner.
The current LITO income levels are outlined in the table below.
|$37,000 or less||$445|
|$37,001 to $66,667||$445 less 1.5% of the portion of your taxable income that exceeds $37,000|
|$66,668 and above||Nil|
The LITO levels for 2022/23 and beyond (i.e. when LMITO ceases) are below.
|$37,500 or less||$700|
|$37,501 – $45,000||$700 less 5% of the portion of your taxable income that exceeds $37,000|
|$45,001 – $66,667||$325 less 1.5% of the portion of your taxable income that exceeds $45,000|
|$66,668 and above||Nil|
From 1 July 2018 to 30 June 2022 taxpayers may be eligible for both LITO and LMITO. Your eligibility for both is automatically determined and applied by the ATO when they assess your income tax return, so there’s no need to do anything.
Putting the two together
Both Jane (Example 1 above) and Mitchell (Example 2 above) would be eligible for the LITO in addition to the LMITO this financial year.
Jane can get the full LITO of $445. She can add this offset amount to her partial LMITO of $255, giving her total offsets of $700.
Mitchell’s LITO will be calculated as follows:
$445 – (1.5% x ($45,000 – $37,000))
= $445 – (1.5% x $8,000)
= $445 – $120
Mitchell can add his partial LITO of $325 to his partial LMITO of $855, for total offsets of $1,180.
However, Amy (Example 3 above) would not be entitled to any LITO because her taxable income exceeds $66,667.
Disclaimer: The contents of this article are for the purposes of providing general information only. Persons should seek appropriate advice from a licensed tax agent, accountant or financial planner before undertaking any investments or strategies with respect to their tax or superannuation interests.