Date posted: 8/05/2018 5 min read

The new Low and Middle Income Tax Offset - Prepare for lots of client questions

Few clients understand tax offsets. But now many will be curious about their entitlement following the Federal Budget.

In brief

  • Tax offsets are claimed, then calculated by the ATO
  • Practitioners rely on tax software for offset calculations
  • But come Tax Time 2018, clients may ask for offset forecasts for future years

How to explain the Federal Budget 2018 Low and Middle Income Tax Offset to clients

The proposed Low and Middle Income Tax Offset (LMTO) is a new non refundable tax offset of up to $530 annually to Australian resident low and middle-income taxpayers. It will be available for the 2018 19, 2019 20, 2020 21 and 2021 22 income years and will be received as a lump sum on assessment after an individual lodges their tax return. 

Those with a taxable income:

  • of $37,000 or less will benefit up to $200. 
  • between $37,000 and $48,000 will see the value of the offset increase at a rate of three cents per dollar to the maximum benefit of $530
  • from $48,000 to $90,000 will get the maximum benefit of $530
  • from $90,001 to $125,333 see the offset phase out at a rate of 1.5 cents per dollar. 

Got that? Wait, there’s more.

LMTO key features

The benefit of the LMTO is in addition to the existing Low Income Tax Offset. And let’s not forget all the other offsets to which an individual client might be entitled, depending on their specific circumstances. Here is the ATO’s current list:

Offsets and rebates

Read more about the ATO’s offsets and rebates

Read more

Most offsets are non-refundable so the ATO apply these first to reduce any income tax payable.

If any income tax is still payable, the ATO then apply refundable tax offset – such as franking tax offsets (but note Labor’s policy to deny such refunds if elected).

Why so complex?

Because offsets allow the government to target those taxpayers it wants to benefit, as distinct from adjusting tax brackets which produces a flow-on benefit to those on higher incomes.

Good luck explaining all that. Let’s hope software houses or the ATO build a forward-looking tax calculator soon to help you get the message across.

After all, it’s in the government’s interests to actually quantify the after tax benefit taxpayers will enjoy.

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Tax reform needed in May budget

Read Michael Croker’s opinion piece in Acuity

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Pre Budget Submission

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