A relatively recent change to the law means that eligible taxpayers can significantly reduce their tax liability by claiming what’s known as the Low and Middle Income Tax Offset. This is because a tax offset means you pay less tax on your taxable income. Your taxable income is your total income for a financial year, minus any tax deductions.
To help you take steps to potentially reduce how much tax you pay, we’ve created this guide to introduce you to the offset and determine whether you’re eligible. We’ll also show you how to apply the Low and Middle Income Tax Offset.
In this article, we cover:
- What is the Low and Middle Income Tax Offset?
- Who is eligible for the Low and Middle Income Tax Offset?
- How much is the Low and Middle Income Tax Offset?
- How do I apply for the Low and Middle Income Tax Offset?
- How does the Low And Middle Income Tax Offset affect the tax I pay?
- Key takeaways
What is the Low and Middle Income Tax Offset?
As the name suggests, the Low and Middle Income Tax Offset helps low- and middle-income earners to reduce the amount of tax they pay.
Are there different Low and Middle Income Tax Offsets?
If you pay tax, at the time of writing you can claim the:
- Low Income Tax Offset, if your taxable income is less than $66,667
- Low and Middle Income Tax Offset, if your taxable income is less than $126,000.
How is the Low Income Tax Offset different to the Low and Middle Income Tax Offset?
The Low and Middle Income Tax Offset was originally introduced as part of the Australian Government’s Personal Income Tax Plan in the 2018 Budget. Initially, stage one of this Plan’s implementation was supposed to run between 1 July 2018 and 30 June 2022. After that, stage two would see it as a final, rather than just a temporary, measure. The idea behind the stage two implementation was to increase the threshold for the Low Income Offset to include individuals that earned an annual income of up to $120,000. There would then be no need for a Low and Middle Income Offset. The change would simply adjust the existing Low Income Tax Offset.
However, given the economic downturn caused by the coronavirus pandemic, the Government announced that it would bring forward stage two of the plan, to take effect from 1 July, 2020 instead of 1 July, 2022. Rather than removing the Low and Middle Income Tax Offset simultaneously, the Government also announced that it would be extended for the 2020/21 financial year. This means that from 1 July, 2018, to 30 June, 2021, you may be eligible for both tax offsets.
The Australian Taxation Office (ATO) will work out if you’re eligible for either or both of these offsets when it assesses your income tax return, so there’s no need to do anything extra.
Who is eligible for the Low and Middle Income Tax Offset?
You can work out if you’re eligible to claim the Low and Middle-Income Tax Offset based on your annual taxable income. You’ll be eligible for at least a partial offset if your taxable income is $126,000 or less.
How much is the Low and Middle Income Tax Offset?
The following taxable income thresholds apply to the Low and Middle Income Tax Offset at the time of writing:
|Taxable income amount||Low And Middle Income Tax Offset|
|$37,000 or less||$255|
|More than $37,000 but less than $48,000||$255 plus 7.5% of the amount above $37,000|
|More than $48,000 but less than $90,000||$1,080|
|More than $90,000 but less than $126,000||$1,080 minus 3% of the amount above $90,000|
How do I apply for the Low and Middle Income Tax Offset?
You don’t need to apply for the offset, as the ATO will apply it automatically for you once you lodge your tax return.
How does the Low and Middle Income Tax Offset affect the tax I pay?
The tax offset amount you can claim based on the taxable income threshold will reduce the amount of tax you’ll have to pay to the ATO.
Marsha earns a taxable income of $39,500 for the 2020/21 financial year.
As Marsha earns less than $126,000, she is eligible to receive the Low and Middle Income Tax Offset.
Her tax offset will be calculated according to the relevant taxable income threshold:
$255 + [7.5% x ($39,500 – $37,000)]
= $255 + (7.5% x $2,500)
= $255 + $187.50
The ATO will, therefore, reduce Marsha’s taxable income by $442.50.
It’s worth noting that the Low and Middle Income Tax Offset is a non-refundable tax offset and can only lower the amount of tax you’re liable to pay to zero at best. Any unused offset amount can’t be refunded.
What’s more, it can only reduce tax owing. This means it can’t be used to reduce your Medicare levy, which is generally 2% of your taxable income, or Medicare Levy Surcharge (where one might apply).
If you’re a low or middle-income earner, the ATO affords you two possible tax offsets:
- the Low Income Tax Offset if your taxable income is less than $66,667
- the Low and Middle-Income Tax Offset if your taxable income is less than $126,000
Currently, taxpayers could be eligible to have both offsets applied to their taxable income.
There is no extra paperwork needed, as the ATO will simply calculate if you’re eligible and then apply the offsets you qualify for to reduce your taxable income.
You should take note, however, that the Low and Middle Income Offset:
- is a non-refundable tax offset, which means you won’t receive a refund from the ATO, and it can only reduce your tax payable to zero – any unused offset amount can’t be refunded
- is only applicable to people who earn below relevant income thresholds
You should get in touch with a qualified tax agent or accountant if you’re feeling unsure about whether you are eligible for the tax offset or not. At Box Advisory Services, for example, you can book a free consultation or give us a call to discuss your concerns.
Cover image source: Yuriy K/Shutterstock.com
About Davie Mach
Davie Mach is a Chartered Accountant and Director of Box Advisory Services, a boutique accounting firm focused on assisting small businesses and contractors in taxation, business advisory and accounting.
Davie has over 15 years’ experience in finance and a Bachelor of Commerce, Accounting and Taxation from the University of New South Wales. You can find him on LinkedIn.