Tax offsets and why the recent personal income tax cuts don’t necessarily give you cash back

After 30 June 2019 ticked over, the Australian Taxation Office (ATO) was swamped with calls from taxpayers who wanted to know how and when they would get the $1,080 cash back they thought they were entitled to as a result of the recent personal income tax cuts. There was also appeared to be a surge in individuals lodging their tax returns early this year, wanting to benefit from the ‘cash back’.

The fact is that the changes to the personal income tax was in the form of tax offsets, rather than straightforward cash payments to tax payers. What this means is that first, you have to have a tax liability to benefit from the changes. If your earnings were below the tax free threshold, then there is no tax liability that the offset can be applied against. You don’t get any cash back if you haven’t paid anything in the first place.

Also, the offsets are non-refundable. So if you did have income over the tax free threshold and were eligible, any offset amount applicable that is above your tax payable will not be result in cash back. It can only be used to reduce your tax payable to $0.

So when are you eligible for a tax offset?
There are actually currently two offsets – the low income tax offset and the low and middle income tax offset. The low and middle income tax offset is the recent change that was introduced in the 2018-19 Federal Budget.

To be eligible for either or both of these offsets, you must be an Australian resident for income tax purposes and have a taxable income.

Low income tax offset
This is a maximum offset of $445. If your taxable income is $37,000 or less, you get the maximum amount. For each dollar over $37,000 (up to an amount of $66,667), the $445 maximum is reduced by 1.5 cents. So if your taxable income was $40,000, the offset would be $445 less ($3,000 x 0.015) = $400.

Low and middle income tax offset
This applies to taxable income up to $126,000. The offset will be between $255 and $1,080. Where your taxable income is:

    1. Less than $37,000, the offset is $255
    2. From $37,000 up to $48,000, the offset is $255 plus 7.5% of the amount between $37,000 and $48,000, so a maximum of $1,080
    3. From $48,000 up to $90,000, the offset is $1,080
    4. From $90,000 up to $126,000, the offset is $1,080 less 3% of your taxable income above $90,000.

Note that neither offset can be used to reduce tax payable on unearned income for persons under 18 years of age as at 30 June.

Looking into the future
As currently legislated, the low and middle income tax offset only applies for four income years: 2018-19, 2019-20, 2020-21 and 2021-22. From 1 July 2022, the income tax rate thresholds are set to change and the low income tax offset base rate to increase.

A future Federal Budget or change of Government may result in changes to the tax rates, thresholds and offsets.

For further information and some examples of how the offsets apply, see https://www.ato.gov.au/Individuals/Income-and-deductions/Offsets-and-rebates/Low-and-middle-income-earners/.

If you have any questions this article, please contact us on 03 5339 3200 or contact us here.

Thanks for reading.

By Genna Kidd

The information contained on this website has been provided as general advice only.  The contents have been prepared without taking account of your personal objectives, financial situation or needs.  You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.

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