Low and middle income earners about to be hit with a massive tax increase

by Greg Jericho

The end of the Low-Middle Income Tax Offset will deliver a tax increase of up to $1,500 for people earning under $90,000 – a 3% tax rise for someone on $50,000

While recently the income tax topic of the moment has been the Stage 3 tax cuts, this year around 85% of all taxpayers are being hit with a tax increase due to the end of the Low-Middle Income Tax Offset (LMITO).

The LMITO was first introduced in 2018-19 as part of the former government’s tax package. It was designed to rise from $255 for those earning under $37,000 to a maximum of $1,080 for those earning between $48,000 and $90,000 and then declining until reaching zero for those earning more than $126,000. This covered around 85% of all taxpayers.

Crucially though, it was only temporary and meant to end in 2019-20. However, due to the pandemic the Morrison government extended the offset until 2020-21. Then in the run-up to this year’s election, as part of the March budget, the government extended the LMITO again to 2021-22 and added a flat $420 on top – making the maximum offset equal to $1,500.

However given the LMITO has now ended, when people do their taxes next year they will no longer be able to claim the offset. For many, this will be in effect a $1,500 tax increase. And for someone with an income of $50,000, it is a 3% tax rise.

The end of the LMITO highlights how the tax plan of the previous government was geared towards benefitting high-income earners – who would gain a massive and permanent tax cut, while low and middle-income earners would only receive their greatest benefits from the tax plan temporarily.

For all workers earning less than $96,000 any benefit, they would get from the Stage3 tax cut will have been wiped out by the end of the LMITO.

It means once the Stage 3 tax cuts come into effect, the only people better off compared to 2021-22 will be those earning nearly $100,000 a year – some $40,000 above the median income.

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