Tax season doesn’t have to be overwhelming. If you earn below a certain threshold in Australia, the Low Income Tax Offset (LITO) could save you hundreds of dollars.
Yet, many Australians either don’t realise they’re eligible or miss opportunities to maximise their savings.
The LITO is designed to reduce the tax you pay if your taxable income is below $66,667. Eligible individuals can save up to $700 annually, money that could go toward bills, savings, or even a holiday.
Understanding how the LITO works and how to take full advantage of it is crucial for better financial planning.
This guide explains everything you need to know, including eligibility, calculations, and strategies to maximise your savings.
What is the Low Income Tax Offset?
The Low Income Tax Offset (LITO) is a non-refundable tax offset that directly reduces the amount of tax you owe the Australian Taxation Office (ATO). It’s automatically applied when you lodge your tax return, so no separate application is needed.
The offset operates on a sliding scale. The maximum offset is $700 for incomes up to $37,500, gradually decreasing as income rises, until phasing out completely at $66,667.
Unlike deductions, which lower your taxable income, a tax offset reduces the tax amount directly, making the LITO especially valuable for low-to-middle income earners.
Eligibility for the Low Income Tax Offset
Income Thresholds
Eligibility for the LITO depends on your taxable income. The offset is calculated as follows:
Taxable Income | Low Income Tax Offset |
|---|---|
$0 – $37,500 | $700 |
$37,501 – $45,000 | $700 minus 5 cents for every dollar over $37,500 |
$45,001 – $66,667 | $325 minus 1.5 cents for every dollar over $45,000 |
$66,668 and above | Nil |
For example:
- If you earn $40,000, your offset is $575 ($700 minus $125, which is 5 cents for every dollar over $37,500).
Residency Requirements
To qualify, you must be an Australian resident for tax purposes. This generally includes permanent residents or individuals who have lived in Australia for at least six months during the financial year.
Temporary and non-residents are typically ineligible, with some exceptions for specific visa holders.
The LITO is non-refundable, meaning it only reduces tax liabilities to zero. It doesn’t generate a refund if the offset exceeds the tax you owe.
Lodging a tax return is also required to claim the offset, even if your income falls below the tax free threshold.
Calculating Your Low Income Tax Offset
The ATO automatically calculates your offset when you lodge your return, but understanding the calculation can aid your planning.
The LITO reduces in two main tiers:
- Income between $37,501 and $45,000: The offset decreases by 5 cents for every dollar over $37,500 until it reaches $325 at $45,000.
- Income between $45,001 and $66,667: The offset decreases by 1.5 cents for every dollar over $45,000, phasing out completely at $66,668.
Examples
- Income of $30,000: You receive the full $700 offset.
- Income of $50,000: Your offset is $250 ($325 minus $75, or 1.5 cents × $5,000).
- Income of $60,000: Your offset is $100 ($325 minus $225, or 1.5 cents × $15,000).
Strategies to Maximise the Low Income Tax Offset
Although the offset is automatically applied, you can take steps to maximise your eligibility:
1. Increase Tax Deductions
Reducing taxable income through eligible deductions can increase your offset. Common deductions include:
- Work-related expenses (e.g., uniforms, tools, travel)
- Self-education costs
- Home office expenses
- Union fees or professional memberships
- Charitable donations over $2
Keep thorough records to ensure you claim everything you’re entitled to.
2. Salary Sacrificing
Redirecting part of your pre-tax salary into superannuation reduces taxable income. For example, earning $68,000 but salary sacrificing $2,000 into super lowers your taxable income to $66,000, making you eligible for a partial offset. It also benefits your retirement savings with concessional tax rates.
3. Timing Income and Deductions
If your income fluctuates near the thresholds, consider deferring income or pre-paying deductible expenses:
- Delay bonuses to the next financial year.
- Bring forward deductible expenses like professional development or work equipment.
This is particularly useful for self-employed individuals or those with flexible incomes.
4. Super Contributions
Making personal super contributions (up to the concessional cap of $27,500 per year) can reduce your taxable income, potentially increasing your offset.
Common Pitfalls to Avoid
- Mistaken Deductions
Only claim legitimate deductions directly related to earning your income. Ensure they aren’t reimbursed by your employer and that you have proper records.
- Misunderstanding Thresholds
The offset is based on taxable income, not gross income. Ensure you calculate your eligibility correctly to avoid surprises.
- Failing to Lodge a Tax Return
Even if your income is below the tax-free threshold, lodging a return ensures you receive any offsets or refunds you’re entitled to.
- Not Updating Tax Information
If your income or employment changes, update your tax file number declaration to ensure the correct amount of tax is withheld.
Case Studies: Savings in Action
1. Sarah, Retail Worker
Sarah earns $35,000 and claims $1,500 in deductions, reducing her taxable income to $33,500.
Savings: She receives the full $700 offset, reducing her tax from $2,242 to $1,542. Combined with her deductions, she saves $975 in tax.
2. James, Freelance Designer
James earns $48,000, salary sacrifices $3,000 into super, and claims $2,000 in expenses.
Savings: His taxable income drops to $43,000, giving him an offset of $425. He also saves $450 in super tax concessions, totalling $875.
3. Maria, Part-Time Nurse
Maria earns $52,000 and contributes $6,500 to her super.
Savings: Her taxable income reduces to $45,500, qualifying her for a $242.50 offset. Combined with super tax savings, she saves approximately $1,200.
The Future of the Low Income Tax Offset
Potential Changes
Tax policies evolve regularly. While the LITO has remained stable, changes to thresholds or offset amounts could impact eligibility. Staying informed is key to adapting your tax strategy.
Supporting Low-Income Earners
The LITO plays a vital role in reducing financial pressure for low-income Australians. Policymakers must ensure future changes continue to support the most vulnerable populations.
The Low Income Tax Offset is a valuable tool for reducing your tax bill. By understanding its mechanics and using strategic planning, you can maximise your savings and improve your financial wellbeing. Don’t leave money on the table review your income, consult a tax professional if needed, and take full advantage of the LITO.
