The federal government will hand down the budget in less than three weeks, and is widely expected to extend a tax break known as the “lamington” – the low and middle income tax offset (LMITO).

The offset, which gives low and middle income earners a tax break of between $255 and $1,080, was first announced as a temporary measure in 2018, and after being extended last year, was due to end in June.

But with more than 10 million workers facing an effective tax hike when the LMITO is wound up, the government is set to extend the relief for another year at a cost to the budget of about $7.2bn.

Who will benefit from the tax break?

If your taxable income is between $37,001 and $126,000, you will get some or all of the low and middle income tax offset.

Research from BankWest and Curtin University published in the Sydney Morning Herald his week found that about 10 million people are in this cohort and would face a tax hike from next financial year without the LMITO being extended.

About 3.4 million workers who have a taxable income between $48,000 and $90,000 – 50% of which are women – will receive the full benefit of the $1,080 offset.

How much is it worth?

The amount of offset is calculated according to your taxable income and how much tax you have paid, and is applied when a tax return is lodged.

Based on current figures – which could change in this year’s budget – the LMITO is worth between $255 and $1,080 and is paid according to a sliding scale.

For those earning less than $37,000, the offset is worth $255.

Between $37,001 and $48,000, the offset is $255 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,080.

Those earning between $48,001 and $90,000 receive the maximum $1,080.

Anyone earning more than $90,001 but less than $126,000 receives $1,080 minus 3 cents for every dollar of the amount above $90,000.

What about the government’s other tax cuts?

In the 2020-21 budget, which was released last October because of the Covid pandemic, the government rejigged its personal income tax plans with the aim of stimulating the economy.

This included bringing forward stage two of the personal income tax plan to 2020-21, which changed the tax schedule.

This includes:

  • lifting the upper threshold of the 19% tax rate from $37,000 to $45,000

  • lifting the upper threshold of the 32.5% tax rate from $90,000 to $120,000

The government also increased the low income tax offset (LITO) from $445 to $700.

Who benefited from the changes?

The bringing forward of the stage two cuts resulted in a permanent tax cut of $47 a week for high-income earners, compared to the one-off $21 weekly cut for middle-income earners (which came from the LMITO).

People earning more than $120,000 received the biggest benefit, with a permanent cut of $2,430 in 2020-21 and beyond.

The government argued that as a proportion of tax payable, lower income earners were better off because a person earning $40,000 would pay 21% less tax compared to those on $80,000 paying 11% less.

Anything else?

Stage three of the personal income tax plan scraps the 37% income tax rate, reduces the 32.5% tax rate to 30%, and increases the upper threshold of the new 30% rate from $180,000 to $200,000.

Due to come into effect in 2024-25, stage three is the most controversial part of the tax plan as it locks in the biggest tax benefit for the higher paid, with about a third of the $95bn cost to flow to workers earning more than $180,000.

Labor opposed stage three when the government presented it in 2019 but did not vote against it because it was brought to parliament in an omnibus bill.

It maintains that stage three is “irresponsible” but has not yet determined if it will go to the next election with a pledge to repeal the cuts.

This content first appear on the guardian

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