Politics

Junk Explained: The ‘Lamington’ Tax Offset And Why You’ll Be Worse Off If The Government Cuts It

If cut, 90 percent of taxpayers will be worse off.

josh frydenberg photo lamington tax

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Treasurer Josh Frydenberg has reiterated his point that the low-middle-income tax offset (LMITO, or ‘Lamington’) is not a “permanent” tax reduction amid reports that the much-needed lifeline will be cut in the upcoming budget.

With the release of the federal budget just weeks away, we’re going to be hearing a lot about taxes. Boring as that may be, it’s important to understand how this will impact you. And if you’re making less than $126,000 per year (which is, let’s be real, probably most of us), the LMITO is of utmost importance to you.

What Are The Current Tax Brackets?

Before we get into the Lamington (sadly not as tasty as it sounds), it’s important to understand the tax brackets as they currently stand.

What Is The LMITO?

The low-middle-income tax offset is a temporary tax cut for low and middle-income taxpayers, which is factored in when you lodge your return at the end of the financial year.

It was introduced in the 2018-19 budget as part of a seven-year overhaul of how we pay personal income tax. This was always designed to be a temporary measure, but was replaced in the 2022 budget by the Stage 2 tax cuts, according to the Grattan Institute.

If you earned under $126,000, you receive virtually the same tax cut under Stage 2, while higher-income earners receive an even greater tax cut.

But then we get to Stage 3 — scheduled for 2024 — which seeks to introduce a single flat tax rate for every dollar earned between $45,000 and $200,000. Basically, this squashes the three highest tax brackets into one, with residents only paying a higher tax rate for dollars earned over $200,000.

To put it simply, this is a huge tax cut for anyone earning between $120,000 and $200,000 — who will end up paying the same marginal tax rate as the rest of us, despite making bucket loads more money.

It’s One Tax Offset, What Could It Possibly Cost? Ten Dollars?

According to the Australia Institute’s chief economist Richard Denniss, the offset — as it currently stands — costs the budget approximately $7 billion annually. Comparatively, the Stage 3 cuts that mean precisely nothing to anyone earning less than $120,000 will cost the budget a whopping $16 billion per year.

However, it’s worth noting that the current offset benefits more than 10 million people across the country and — as we know — more money in the pockets of low and middle-income earners generally serves as a net positive to the economy.

Is It Going To Be Cut?

Nine Newspapers reported earlier this week that the threat of inflation could see our delicious lamington cut in an attempt to prevent the Reserve Bank from having to lift interest rates.

But, on the contrary, extending the LMITO could be a vital lifeline for the Coalition’s chances of winning the next election, especially given how bad things are looking right now.

Nothing has been confirmed yet, and won’t be confirmed until the release of the budget on March 29, but when pressed about it on Monday, Frydenberg didn’t exactly instil much hope for low and middle-income earners.

“The low- and middle-income tax offset is not a permanent feature of the tax system. We’ve introduced it due to the particular economic circumstances of the time,” he said. “If you think back to Kevin Rudd and the global financial crisis with their $900 cheques or, indeed, during this recession when we did our $750 payments to pensioners, carers and veterans, that was based on the economic circumstances at the time. They were a supplement based on the conditions at the time.”

While he made it clear that the government “haven’t made a decision about the low- and middle-income tax offset” yet, it’s worth noting that the economy is recovering far better from COVID than any of us expected. So it wouldn’t exactly be surprising to see it cut.

It’s also important to note that Labor has also refused to promise an extension of LMITO, and will wait to see how the Coalition handles it before it makes its position known.

What Will A Cut Mean For Every Day Australians?

According to an analysis by Australia Institute, pulling the plug on the Lamington will mean 90 percent of taxpayers (see: low and middle-income earners) paying more tax until mid-2024 when the seven-year overhaul is complete.

“Scrapping the LMITO will see 90 percent of taxpayers pay more tax, with the LMITO – as the name suggests — mainly benefitting middle income earners,” Australia Institute said in its key findings.

As per the analysis, all taxpayers earning less than $90,000 annually — which equates to two thirds of the population — will be left worse off by the cut, if it happens.

“The removal of the LMITO and the introduction of the stage 3 tax cuts do not occur at the same time,” it said.

“The LMITO ends in 2021-22 (with the refunds paid in 2022-23), while the stage 3 tax cuts do not start until July 2024. This means that almost 90 percent of those who get the LMITO will face a tax increase in 2022-23. None of them will get any benefit from the stage 3 tax cuts until 2024-25.”