Did you know that the COVID-19 tax cuts (otherwise known as tax offsets) introduced in 2020 are still applicable for the 2021/2022 financial year? Well, they are! And you could be eligible for a $1,080 discount to your tax payable.
But what is a tax offset? Who is eligible for the tax offset? How do you claim it? These are questions that you must know the answer to because it could save you thousands of dollars.
If you don’t know the answers to these questions, don’t lose sleep over it! By reading this article, you can start your journey to becoming a tax offset professional. So get comfortable and let’s assess the situation.
Australian Tax Brackets 2021 and 2022
Before you start calculating or worrying about anything to do with tax, you must have an understanding of what income tax rates/individual tax rates are for 2021 and 2022. Also known as tax brackets, these rates determine how much tax you pay and how tax offsets are calculated. The rates are:
- Bracket 1: $0-$18,200 you pay no tax
- Bracket 2: $18,201-$45,000 you pay 19 cents for every $1 you earn over $18,000
- Bracket 3: $45,001-$120,000 you pay $5,092 + 32.5 cents for every $1 you earn over $45,000
- Bracket 4: $120,001-$180,000 you pay $29,467 + 37 cents for every $1 you earn over $120,000
- Bracket 5: $180,001 and above you pay $51,667 = 45 cents for ever $1 you earn over $180,000
What Is A Tax Offset?
You might be thinking that there are new tax cuts in Australia/new tax rebates, however, they are more or less just extensions of the tax offsets/new tax rates from 2020.
The definition of a tax offset is, as according to the ATO, a sum that; “reduces the tax you pay (known as your tax payable) on your taxable income. Your taxable income is your total income minus any deductions you claim.”
A key thing to notice in this definition is that it only “reduces the tax you pay”, and doesn’t increase your refund. What does this mean? Well it means even though the tax offset can be up to $1,080, if you’re only required to pay $1 on tax, you will only get a $1 discount so you pay $0 in tax. You will not get paid an extra $1,079. The offset will only reduce your tax payable.
What Is LMITO?
LMITO, or the low and middle income tax offset, was an increase in tax cuts for low and middle income earners in July 2020. This was designed to help people during COVID-19. This saw the tax offset increase from $540 to $1,080 and saw the income required to access it increase from $90,000 to $120,000.
LMITO was scheduled to end on the 30th of June 2020, but the federal budget tax cuts have been extended until the end of the 2022 financial year. This means you may be eligible to claim the tax offsets for another year! Check with a tax professional to be sure.
Are You Eligible For The LMITO in 2021/2022?
If you are wondering if you are eligible for the LMITO, the best thing to do is ask a qualified tax accountant. However, there are two broad criteria that are a rule of thumb for you to be able to claim LMITO. They are:
- You must be an Australian resident for tax purposes
- You must earn up to, but no more than $126,000
How Big Is Your Tax Offset Discount?
Again, your tax offset is not a refund, so you can only discount your tax payable. If you are paying tax, this is definitely something to get excited about.
Additionally, if you have any debt with the ATO, you can use the LMITO to reduce that debt. Unfortunately, HECS/HELP debt is unaffected by LMITO.
Your tax offset is dependent on your tax threshold for 2021 and 2022. The offset is:
- If you earn less than $37,00 per year you will receive $255 reduction
- If you earn between $37,000 and $48,000 per year you will receive $255 + 7.5% of the amount you earn over $37,000 as a reduction
- If you earn between $48,000 and $90,000 you will receive $1,080 as a reduction
- If you earn between $90,000 and $126,000 you will receive $1,080 – 3% of the amount over $90,000
How Do You Claim The LMITO In 2021/2022 Financial Year?
To claim LMITO, it is a fairly automatic process. All you need to do is submit a tax return and the offset should be calculated based on your taxable income that you have reported.
What you can do to reduce your tax even further is to make sure you have used every tax deduction that you are entitled to. You can read more on that here, or even check out your industry specific tax deductions here.
However, the absolute best way to maximise your tax return and make sure you don’t have to pay more than you have to is with a qualified tax accountant.
Who Is The Best At Maximising Your Tax Return?
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