Budget 2021: Low and middle income tax breaks expected for another year

Australian tax documents with three $50 notes and two $100 notes on top and a fountain pen and calculator.

It is anticipated that the federal government will extend the Low and Middle Income Tax Offset (LMITO) for another 12 months, when Treasurer Josh Frydenberg hands down the 2021 Federal Budget Plan on Tuesday.

Tax offset, what you need to know

The Low and Middle Income Tax Offset was first introduced by the government in 2018 as part of the bigger seven-year, Personal Income Tax Plan. The offset was stage one of the plan and was originally intended to end last year. However, the government decided to keep it going during the pandemic and now it is expected to be extended for another year.

It was brought in as an addition to the already-in-place low income tax offset (LITO), which is designed to help out earners with an annual salary below $37,000. The low and middle income tax offset extends this to earners with a taxable annual salary between $37,000 and $126,000.

In the 2020 federal budget, the maximum low income tax offset was increased to $700. The low and middle income tax offset amount is currently between $255 and $1,080 for individual taxpayers. If the tax offset is extended, it will come in the form of a tax rebate for those eligible.

What if the government doesn't extend the tax offset?

Research published by Rebecca Cassells and Alan Duncan from the Bankwest Curtin Economics Centre suggests that withdrawing the tax offset for low and middle income earners would have a disproportionate effect on women.

According to the authors, if the LMITO came to an end in 2021 women could face an average yearly tax hike of around $502. Men would face a lower yearly tax increase of around $385.

The authors say that once stage three of the Personal Income Tax Plan is introduced (as above), net taxes could be reduced by an average of $637 per year for women and $2,989 per year for men. However, stage three is not set to start until the 2024/2025 tax year. This stage of the government's plan includes:

  • Lowering the 32.5% tax rate to 30%
  • Raising the upper threshold for the 30% tax bracket from $90,000 to $120,000
  • Removing the 37% bracket
  • Raising the 45% lower threshold from $180,000 to $200,000.

Director of Tax Communications at H&R Block, Mark Chapman says that if the government were to stick to its original plan (meaning no personal tax cuts for 2021/2022) low and middle income earners could face a tax rise. He says, "Tax rises will be between $255 and $1,080, with the worst affected earning between $48,001 and $90,000 per annum."

Chapman added that "the government needs to take action to prevent this highly damaging tax rise by extending the availability of the offset through until 1 July 2024."

Criticism of the government's tax cut plan

Whether the tax offset is extended or not, not everyone is impressed with the scheme. Chief executive of ACOSS (the Australian Council of Social Service), Cassandra Goldie has criticised the government's tax cuts.

Commenting on the federal government's Family Home Guarantee scheme - which aims to help single parents buy a home with a deposit as little as 2% - Goldie said the program will only benefit a handful of middle-income single parents.

"The scheme will cost the government just $300,000 over the forward estimates because the risk of defaulting amongst single parents, overwhelmingly women, is so low," said Goldie. "For the government, this specific measure is cheap as chips. At the same time the government appears determined to lock in billions of dollars of tax cuts which mostly benefit people on higher incomes, who are mostly men."

Goldie says the federal government should be investing money into critical caring services, not tax breaks that benefit higher income earners.

Want to read more about the 2021 Budget? Check out our quick guide or check out the latest episode of Mozo's podcast The Finance Burrito