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Low and Middle-Income Earners Tax Offsets

  • December 17, 2021
  • 5 min read
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Low and Middle-Income Earners Tax Offsets

There’s a new law in town that brings relief to low and middle-income earners. The Low and Middle-Income Earners Tax Offset, or LMITO as it is commonly known, came into law on 1 July 2017.

LMITO was introduced to help low and middle-income earners reduce their tax burden.

What is a tax offset?

A tax offset is a reduction in tax payable. So if you are eligible for an offset, your tax liability will be reduced. However, according to the ATO, offsets can reduce your tax payable to zero, but on their own, they can’t get you a refund. You can’t claim offsets, they’re included in your tax return.

For this reason, an offset is not the same as a deduction or a credit. You do not need to itemize deductions or complete any extra forms for them either. If you are eligible to claim an offset, it will be automatically calculated and included in your Notice of Assessment.

What is the Low and Middle Income Tax Offset (LMITO)?

This is an offset that helps low and middle-income earners reduce their tax liability. The LMITO was introduced through the Treasury Laws Amendment (Improving the Budget) Act 2017, which received Royal Assent on 19 April 2017.

The LMITO is also known as an income tax offset or a tax refund. It can be claimed in addition to other offsets, like the Low Income Tax Offset (LITO) or Senior Australians Tax Offset (SATO). If you qualify for the LMITO, it will be calculated at a rate of 7.5%, which is half the rate of the full LITO (15%).

How is the Low Income Tax Offset different from the Low and Middle Income Tax Offset?

The Low Income Tax Offset (LITO) is a tax offset that was introduced in 2000 and it gives low-income earners a higher tax refund than the average person. The LMITO was introduced in 2017 and it gives a tax refund to middle-income earners.

LITO is calculated at a rate of 15% on your taxable income.

For example, If your taxable income is:

  • $37,500 or less, you will get the full offset of $700
  • between $37,501 and $45,000, you will get $700 minus 5 cents for every $1 above $37,500
  • between $45,001 and $66,667, you will get $325 minus 1.5 cents for every $1 above $45,000.

The LMITO is calculated at a flat rate of 7.5%. You only need to complete one form. LMITO is not considered to be a part of your taxable income, but it can reduce your tax liability to zero.

How is LMITO calculated?

LMITO tax offset amount is between $255 and $1,080. If your taxable income is between $37,001 and $126,000 you will be eligible for the offset. In addition to the low-income tax offset.

If your taxable income is:

  • $37,000 or less, the offset will be $255
  • From $37,001 to $48,000, you will get $255 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,080
  • From $48,001 to $90,000, you will get $1,080
  • From $90,001 to $126,000, you will get $1,080 minus 3 cents for every dollar of the amount above $90,000.

The above info can also be obtained from the ATO.

Eligibility.

To qualify for one or both of these offsets, you must meet the following conditions:

1. You must be an Australian resident for tax purposes.

2. You or your spouse/de facto partner (if applicable) must not be entitled to claim the Senior Australians Tax Offset (SATO) on themselves.

3. Your taxable income, including reportable fringe benefits, must be less than the relevant income threshold.

4. You must be earning a low or middle-income.

6. Your total reportable income for the financial year, including bank interest and salary or wages, must not exceed $66,667.

5. You must have at least one dependent child in your care.

What is the difference between tax deductions and tax offsets?

Tax deductions reduce the amount of taxable income you are required to pay tax on. However, tax offsets directly reduce your final tax liability.

Can you claim both?

You can claim these offsets if your adjusted taxable income is below the relevant income threshold and you meet the eligibility criteria.

Example – comparison of tax deductions and offsets

Doreen’s reportable fringe benefits are $1,000. She is entitled to claim a deduction for her reportable fringe benefits. However, she can also claim an LMITO offset if

1. Her taxable income (including reportable fringe benefits) is less than the relevant income threshold.

2. She is earning a low or middle-income.

3. Her total reportable income for the financial year, including bank interest and salary or wages, does not exceed $66,667.

Takeaways.

If you fall under the low or middle-income earner threshold and meet the eligibility criteria, the offset could get you a refund of up to $1,080. There is no paperwork to complete as you automatically get the tax offset when completing your tax return.

Get your taxes done by a professional accountant or tax agent. It can save you time and money by ensuring that you are not missing out on any offsets. The above info can help you in getting the maximum benefit out of the tax return.