Among the number of notable announcements in the 2020 Federal Budget was the proposed fast-tracking of changes to taxation limits.
While the merits of this decision for different socioeconomic groups have already come under scrutiny, it’s important to understand exactly what the changes could mean for you as a taxpayer.
So, here’s a quick rundown of the basics when it comes to tax changes in the 2020/2021 financial year.
What is the low and middle income tax offset?
Taxpayers earning between $45,000 and $90,000 may have noticed an increase on their tax return of up to $1,080 in the past few years. This is the low and middle income tax offset (LMITO).
It was introduced in 2018 to lower the amount of tax relevant workers have to pay, and was set to expire when the government’s second stage tax cuts came into effect in 2022 (more on that soon).
How is the LMITO changing?
The offset isn’t really changing, just sticking around (for now). Since the government is bringing its second stage tax cuts forward by a year, the LMITO could have been slashed as originally planned.
Considering the financial impacts of COVID-19, the government has outlined a plan for the two tax concessions to work in conjunction this financial year, with the second stage cuts being backdated to July 2020.
What are these tax cuts that are being brought forward?
The legislated second stage tax cuts increase the upper limit on tax brackets, meaning tax will be reduced for some earners.
The upper limit of the 19% personal income tax bracket will go from $37,000 to $45,000, and the 32.5% marginal tax rate threshold will rise from $90,000 to $120,000.
The end result is that people who earn between $45,000 and $90,000 will receive up to an extra $2,160 in their pockets.
But remember: the relevant taxpayers were only going to receive the LMITO (also up to $1,080) until the second stage tax cuts were originally planned to kick-off in the 2021/2022 financial year. So, the second stage never actually represented any additional tax savings for people in this tax bracket – but it will do so for the unprecedented economic year of 2020.
So when it comes to new tax cuts for this financial year compared to last, the true one-off cut for low and middle income earners is up to $1,080.
People earning $120,000 in taxable income – the new upper limit on the 32.5% threshold – are set to make the most tax savings this financial year ($2,745).
What should I do with my tax savings?
The government's motivation for bringing the cuts forward and maintaining the LMITO this year is to get Australian’s spending to help grease the wheels of the economy as we move into a recession.
This could be a good option for people with income and housing stability. You can keep it local and support other individuals by buying secondhand items, or look for ethically-minded small businesses to put your money behind.
However, if you’re not in a financial position to be splashing cash right now, you might consider adding extra money to your emergency savings fund.
Make sure your savings are working for you by finding an account with a top interest rate and accessible conditions. You can start your search using Mozo’s savings account comparison tool.