Have taxes on your hard-earned money to feel like a burden? You might be curious about how potential future tax rate changes might affect you. Well, this is a reasonable concern to have, as an Australian taxpayer. After all, knowledge is the key to making a sound financial decision in the ever-changing Australian tax environment.

In this blog, we’ll dive into the low-income tax offset (LITO) and explore what it means for you in 2024 and beyond.

The Status Quo – What You Need to Know

Despite calls for changes to already legislated tax cuts, the recent Budget didn’t bring any adjustments. This means that the stage 3 tax cuts are set to roll out as planned from 1 July 2024, which is the start of the 2024-25 income year. Moreover, the current personal tax rates, which have been in place since the 2021-22 income year, remain unchanged, extending through to the 2023-24 year.

However, there’s a catch for some individuals in the 2022-23 income year. The Low and Middle-Income Tax Offset (LMITO) has come to an end, potentially resulting in higher taxes for this year.

Stage 3 Tax Cuts: A Closer Look

Come 1 July 2024, the stage 3 tax cuts will bring significant changes to tax brackets. The 32.5% marginal tax rate will be lowered to 30% for a substantial bracket spanning from $45,000 to $200,000. Notably, the 37% tax bracket will be abolished altogether. Here’s a breakdown:

• Income up to $18,200: Nil tax payable.
• Income between $18,201 and $45,000: Nil, plus 19% of the excess over $18,200.
• Income between $45,001 and $200,000: $5,092, plus 30% of the excess over $45,000.
• Income over $200,001: $51,592, plus 45% of the excess over $200,000.

The Farewell To LMITO

In the 2022-23 income year, some individuals may face higher tax bills due to the termination of the Low and Middle Income Tax Offset (LMITO). LMITO applied to individuals with taxable incomes below $126,000. For the 2021-22 income year, those earning $90,000 received a $1,500 offset, which decreased by 3 cents for every dollar above $90,000 until it phased out at $126,000.

Starting from the 2022-23 income year, only the Low Income Tax Offset (LITO) will be in effect. The maximum offset is $700. This applies to individuals with taxable incomes under $37,500. Next is for those whose earning is between $37,501-$45,000, the offset starts at $700 and reduces by 5 cents for every dollar above $37,500.

If your taxable income falls between $45,001 and $66,667, you’ll be eligible for an offset starting at $325 and decreasing by 1.5 cents for every dollar above $45,000. Taxpayers earning more than $66,667 won’t qualify for LITO.

Impact On Foreign Residents

Foreign residents and working holidaymakers can also benefit from stage 3 tax decreases from July 1, 2024. Under the legislation, foreign residents will pay 30% on taxable income up to $200,000, down from 32.5% on $120,000. For $45,000 to $200,000 income, working holiday makers’ 32.5% tax rate will drop to 30%.

Conclusion

With tax laws evolving, planning your finances wisely becomes more crucial than ever. Whether you’re anticipating your tax bill for the current year or strategising for future changes, KPG Taxation can help. Our team of tax experts has the knowledge and experience to assist you in making informed financial decisions.