The Low and Middle-Income Tax Offset is Gone. Could Tax Cuts Provide Relief?

low and middle income tax offset

The Low and Middle-Income Tax Offset is Gone. Could Tax Cuts Provide Relief?

As costs of living continue to rise across Australia, tax changes can have a significant impact on household budgets. One such change that many Australians had grown accustomed to was the low and middle-income tax offset. 

This handy offset provided some welcome relief at tax time for those earning up to $126,000. However, all good things must come to an end, and as of July 1, 2022, this offset was removed.

While the loss of the low and middle-income tax offset may sting for some, the revised stage 3 tax cuts could help soften the blow. Originally legislated back in 2019, these tax cuts have been tweaked by the current government to better target relief for low and middle-income earners feeling the pinch.

In this article, we’ll explore what the removal of the tax offset means for Australian taxpayers. We’ll also dive into the key details of the revised stage 3 tax plan and how it aims to put more money back in the pockets of hard-working Aussies across the income spectrum.

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The Low and Middle-Income Tax Offset Explained

The low and middle-income tax offset was a temporary measure introduced back in 2018 by the Coalition government. It provided a tax offset of up to $1,080 for individuals earning up to $126,000 per year. 

The offset amount gradually decreased for those earning above $48,000, phasing out completely once taxable income hit $126,000.

The aim was to put more money back into the hands of low- and middle-income earners to help stimulate the economy and provide relief from the cost of living. For example, a single-income earner on $60,000 would receive the maximum $1,080 offset at tax time.

While the offset was originally legislated to finish on June 30, 2022, it was extended for another year in the 2021-22 federal budget. However, the offset has now been scrapped entirely from July 1, 2022 onwards as part of broader tax reforms.

For many Australian taxpayers, the loss of this offset will mean a higher tax bill and less take-home pay compared to previous years.

What are the New Tax Cuts 2024?

With the low and middle-income tax offset now gone, attention turns to the revised stage 3 tax cuts as a potential source of relief for Australian taxpayers. 

The original stage 3 tax cuts were part of a broader reform package legislated by the Coalition government back in 2019.

The key elements of the original stage 3 plan were:

  • Consolidating the 32.5% and 37% tax brackets into a single 30% rate for taxable incomes between $45,000 and $200,000
  • Increasing the top tax bracket threshold from $180,000 to $200,000 for the 45% rate
  • Abolishing the 37% tax bracket entirely

This substantial tax cut was projected to cost over $240 billion over the first decade. It aimed to address bracket creep and simplify the tax scales by creating a flat 30% rate for a large segment of taxpayers.

However, the Albanese Labor government has now tweaked these legislated stage 3 cuts, making several key changes:

Reinstating the 37% Tax Bracket

The previous plan consolidated the 32.5% and 37% tax brackets into a single 30% rate. However, the revised plan keeps the 37% bracket in place for taxable incomes between $120,000 and $190,000.

Lowering the Bottom Taxable Income Rate to 16%

To provide more relief for low-income earners, the bottom marginal tax rate will be lowered from 19% to 16% under the revised plan.

Lowering the Top Tax Rate Threshold to $190,000

Whereas the original plan had the top 45% rate kicking in at $200,000, this upper threshold has been lowered to $190,000 taxable income under the changes.

So how do these revisions distribute the tax cuts across different income levels? Modelling suggests the biggest beneficiaries will be middle-income earners, particularly those earning between $50,000 and $90,000 per year. Higher income earners above $190,000 will receive smaller tax cuts compared to the original plan.

For example, a nurse earning $70,000 could receive up to $1,455 in tax cuts. A teacher on $90,000 could get $2,430 in tax relief. However, someone earning $200,000 would only receive a $555 tax cut under the revised plan.

Comparing to the Former Tax Offset

Now that we’ve covered the details of the revised stage 3 tax plan, how does it stack up against the now-defunct low and middle-income tax offset in terms of providing cost-of-living relief?

There are a few key differences.

Firstly, while the tax offset applied to individuals earning up to $126,000, the stage 3 cuts provide varying levels of relief across a broader income spectrum. Low-income earners get a larger proportional tax cut from the reduced 16% bottom rate, while middle-income households benefit from the revised tax brackets and thresholds.

Secondly, the offset was a flat, consistent amount up to the $126,000 cap. The stage 3 changes result in different tax savings depending on an individual’s specific taxable income level.

For example, that single income earner on $60,000 who previously received the maximum $1,080 offset may only get around $855 in tax relief under the stage 3 revisions. So they are somewhat worse off.

However, a dual-income household where each earns $90,000 could receive well over $4,000 in combined tax cuts – significantly more than the former offset provided.

From a progressivity standpoint, the revised stage 3 plan concentrates a higher proportion of the overall tax relief towards the low and middle-income bands compared to the original legislated cuts. This better targets cost of living support, although higher income earners do still receive some tax cuts, albeit smaller ones.

Ultimately, while the stage 3 changes don’t replicate the simplicity of a flat tax offset, they aim to spread relief across a broader swathe of the income spectrum in a more progressive manner. Whether they adequately compensate for the loss of the offset will likely be an individual calculation based on each taxpayer’s circumstances.

Cost of Living Considerations

Of course, tax cuts and offsets don’t exist in a vacuum – they need to be considered in the broader context of the rising cost of living pressures facing Australian households. Inflation remains stubbornly high, with the most recent data showing annual price rises of 7.8% as of the December 2023 quarter.

Escalating costs for essentials like groceries, rent, energy bills and interest rates are squeezing budgets across the country. The latest tax relief measures aim to help offset some of this financial strain by boosting take-home pay.

Economic modelling from independent analysts suggests the revised stage 3 tax cuts could provide a modest stimulus to the economy in the short term as consumers have more disposable income to spend and pay down debts. However, the overall impact is expected to be relatively muted compared to the original legislated cuts.

From a longer-term perspective, the tax changes form part of the government’s broader economic plan to address cost of living pressures through a multi-pronged approach of tax reform, targeted payments, investments in skills and training, and measures to boost productivity and real wage growth.

For individual taxpayers, it underscores the importance of reviewing your personal circumstances and implementing smart tax planning strategies to maximise your tax relief entitlements. This could include taking advantage of deductions, offsets and concessions that you’re eligible for.

With the tax system becoming increasingly complex, seeking professional advice from a qualified tax agent is highly recommended, especially for those with investment properties, small businesses or multiple income streams. 

A tax expert can ensure you don’t miss out on any potential savings during these financially challenging times.

Key Takeaways

  • The temporary tax offset of up to $1,080 for those earning up to $126,000 was removed on July 1, 2022
  • This will result in higher tax bills and less take-home pay for many Australian taxpayers
  • Originally legislated in 2019, the stage 3 cuts have been revised by the Albanese government
  • Key changes include reinstating the 37% tax bracket, lowering rates for low incomes, and adjusting thresholds
  • The biggest beneficiaries are middle-income earners between $50,000 – $90,000
  • The revisions concentrate more tax relief towards low and middle-income bands compared to the original plan
  • Maximise deductions, offsets, concessions and tax-effective strategies

For those with complex tax situations – investment properties, capital gains, foreign income sources etc. – engaging a registered tax agent is highly recommended. Our expertise, at Property Tax Specialists, can potentially unlock substantial savings while ensuring full compliance.

Book a consultation today. 

FAQs

What Is the Middle Income Bracket in Australia?

In Australia, the middle-income bracket is generally considered to be the range of taxable income between $48,000 and $180,000 per year. This bracket encompasses a significant portion of the Australian workforce, including many professionals, skilled tradespeople, and middle management roles. The exact tax rates and thresholds may vary slightly from year to year, but this range provides a rough guideline for what is considered a middle income in the Australian context.

What Is the Seniors and Pensioners Tax Offset?

The seniors and pensioners tax offset is a tax concession available to eligible Australian residents who receive certain government payments or meet specific age and income requirements. This offset can reduce the amount of tax payable for those who qualify. To be eligible, individuals must be of Age Pension age or older and meet certain income thresholds. The tax refund amount varies depending on the individual’s circumstances, such as their taxable income and whether they are single or part of a couple.

Do I Get the $1080 Tax Offset 2024?

The $1080 tax offset, also known as the Low and Middle Income Tax Offset (LMITO), was a temporary measure introduced by the government and Australian Tax Office to provide tax relief for low and middle-income earners. 

Is There a Separate Low Income Tax Offset?

Yes, there is a separate low-income tax offset in Australia, distinct from the temporary LMITO mentioned above. The low-income tax offset is a non-refundable tax offset designed to provide tax relief for individuals with taxable incomes below a certain threshold. 

The offset amount and eligibility criteria are reviewed and adjusted annually by the ATO. This offset aims to reduce the burden for low-income earners who have to pay tax and ensure that they don’t pay excessive amounts of tax relative to their income levels.

Disclaimer

Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.

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