BCEC Policy Brief 2021: Extending the Low and Middle Income Tax Offset Beyond 2020-21

The Federal Budget 2020-21 introduced a set of amendments to the Personal Income Tax Plan announced in the previous 2019-20 budget, with the intention to stimulate the economy and reduce the burden of taxation felt by individuals.

Specifically, the additional measures in Federal Budget 2020-21 (Budget Paper No.1) included:

• Bringing forward Stage 2 of the Personal Income Tax Plan to 2020-21:
  • Raising the upper threshold of the 19% tax rate (and lower threshold of the 32.5% tax rate) from $37,000 to $45,000;
  • Raising the upper thresholds of the 32.5% tax rate (and lower threshold of the 37% tax rate) from $90,000 to $120,000;
  • Increasing the Low Income Tax Offset (LITO) from $445 to $700 coupled with changes to the LITO thresholds and withdrawal tapers;
  • Extending the $1,080 Low and Medium Income Tax Offset (LMITO) to 2020-21, with its removal deferred to 2021-22.

Stage 3 of the Personal Income Tax Plan remains in place from 2024-25, comprising the removal of the 37% income tax rate; the reduction of the 32.5% tax rate to 30%; and an increase in the upper threshold of the new 30% rate (and lower threshold of the 45% rate) from $180,000 to $200,000.

This note assesses the combined impacts on net incomes of personal taxation and tax offset changes from 2021-22 through to 2024-25 financial years relative to 2020-21 as the reference year. JobSeeker payments, other pensions and allowance entitlements, and family payments are excluded from the analysis, along with any projected real wage increases.

From these results, we can infer the impact on individuals’ net incomes of an extension to the LMITO over the three years from 2021-22 to 2023-24.

The note also compares the estimated impact of the LMITO removal on women and men.

Watch our explainer on the LMITO