When do I get my tax cut? It’s complicated

When do I get my tax cut? It’s should be a simple question following last week’s federal Budget, but the answer is complicated.

What’s actually changed in this Budget?

In the last week we’ve heard a lot about ‘Stage 2’ of the Government’s three-stage tax plan. Stage 2 was originally supposed to start in 2022. Now it’s been brought forward.

But what’s easy to miss is that Stage 2 doesn’t actually cut taxes for anyone on less than $90,000 a year. For this (very large) group of Australians, it just swaps out one type of tax cut (an offset called the LMITO, the Low- and Middle-Income Tax Offset, from Stage 1) with another (a different offset, plus a bracket shift). The two stages are almost exactly identical for people in this income range.

That might seem like a pointless exercise, but the Government’s stated aim was to make the tax system ‘simpler’, rather than leaving it cluttered with a bunch of different offsets.

This means that if the Government had just brought forward Stage 2 and done nothing else, the result would have been no tax cut for most people. Instead, the Government decided to keep the LMITO alongside the new changes for one year. So instead of replacing Stage 1, Stage 2 now augments it for one year only. The benefit from both stages at once is double what it would otherwise have been this year for those who earn less than $90,000.

The Government describes this as ‘an extra LMITO’. That makes it sound like LMITO is the thing that’s new. But it’s not: the thing that didn’t happen last year but will happen this year is the Stage 2 cut.

Why does that matter if they’re identical? Because they are not identical in timing. Offsets get paid out at tax time in July. Threshold changes – which are one component of Stage 2 – are reflected in fortnightly pay checks.

So, when do I get my tax cut?

To answer this question, we need to examine the Stage 2 changes, which are a combination of threshold changes and a change to another offset – the LITO (Low Income Tax Offset):

  1. LITO increases from $445 to $700. This tapers out faster than before so that nobody earning above $45,000 gets any of the extra bit.
  2. The top threshold of the 19 per cent tax bracket moves from $37,000 to $45,000.
  3. The top threshold of the 32.5 per cent tax bracket moves from $90,000 to $120,000.

The first change – LITO – gives $255 to anyone on less than $37,000. Since LITO is paid at tax time, these people (40 per cent of tax-filers) get nothing new until July next year.

The second change – the 19 per cent threshold – gives $1,080 to everyone who earns more than $45,000. Since it’s a threshold change, it will start reaching these people (50 per cent of tax-filers) in their fortnightly pay packets as soon as the ATO is able to make the necessary adjustments.[1]

If you earn between $37,000 and $45,000 (10 per cent of tax-filers), the answer is mixed: for each extra dollar you earn in this range, you’re getting a little less LITO and a little more threshold change – so a little less next July and a little more now.

The third change – the 32.5 per cent threshold – gives up to an extra $1,350 to the top 20 per cent of tax-filers and will also reach pay packets soon.

The results are summarised in the table below:

As for LMITO – which we were already expecting to receive this year – it is dispensed at tax time. That means it won’t reach anyone for at least nine months. And if we take Stage 1 and Stage 2 as a package – as the Government would like us to – then the bottom 80 per cent of tax-filers will get less than half their tax cut in their pay packet.

[1] Reports suggest this could be as soon as December, although it’s not yet clear whether the months prior to this will be made up at the end of the year, or if fortnightly pay packets will be tweaked to make up for lost time.