Finance Finance News ‘Awful lot of votes’: More than 10 million Australians face tax hikes if offset is abandoned

‘Awful lot of votes’: More than 10 million Australians face tax hikes if offset is abandoned

Oil prices will remain elevated for sometime as tensions remain across Europe, Josh Frydenberg says. Photo: AAP
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More than 10 million Australians face higher taxes this year unless the Morrison government extends an $8 billion offset ahead of the election.

The low and middle income tax offset (LMITO) delivered households a tax break of up to $1080 over the past two financial years, but its future is mired in uncertainty because it was designed as a temporary measure.

Treasurer Josh Frydenberg has yet to confirm whether the government will extend the offset for another year, with reports that cabinet is unsure about which path to take ahead of the next federal election.

But if the LMITO is not extended millions of Australians will pay higher taxes this financial year than the last, signalling a painful correction just as rising cost of living pressures weigh on household budgets.

According to analysis from accounting firm BDO, all taxpayers with annual incomes less than $126,000 will be worse off if the offset isn’t extended.

“Without the LMITO, these taxpayers will pay more,” BDO national leader, tax technical, Lance Cunningham said.

“However, the issue here is this measure was brought in as a COVID-19 stimulus measure and it should only be extended if it is decided that the economy still needs to be stimulated.”

If the government decides to extend the LMITO as a pre-election sweetener for voters, then taxpayers would continue to benefit from outsized tax returns later this year, as was the case during the pandemic.

Independent economist Saul Eslake said the extension has backed the government into a political corner because, while economic conditions are improving, many households are still doing it tough.

“Households just below the average income will face a tax increase of close to $1000 at a time when their incomes haven’t been growing and interest rates might be going up,” he said

“There’s an awful lot of votes in this area.”

How your tax bill could change

The table below outlines how taxpayers on different incomes could be affected if the offset ends.

In total, more than 10 million households stand to be affected by the LMITO decision, whichever way it goes, according to TND analysis of tax office data.

If the offset is not extended, about 5.6 million Australians with annual incomes below $37,000 would be $255 worse off, totaling about $1.4 billion in tax hikes.

Another 6 million taxpayers with incomes between $37,000 and $90,000 would be up to $1080 worse off.

Those taxpayers with incomes between $37,000 and $48,000 will lose between $255 and $1080 if the offset is abandoned, with $75 added to the tax break for every additional $1000 in income above $37,000.

This impact will be felt at tax time, which comes after the election, in the form of lower refunds.

Workers have benefited from record high tax refunds during COVID thanks to the LMITO and other asset write-offs designed to support the household sector through the 2020 recession.

But Mr Eslake said the potential loss of this income for workers should be weighed against the budget pressures facing the federal government.

He said the economy is recovering strongly from the pandemic, which “doesn’t present a compelling case for a tax cut”.

“Given there’s no appetite for cutting spending, why would they contemplate tax cuts?” Mr Eslake said.

But H&R Block tax director Mark Chapman suggested letting the offset expire would cost the government at the upcoming election.

“There is no realistic chance the government wont extend LMITO,” he said.

“To abolish it before an election would quite simply be electoral suicide.”

Mr Frydenberg said on Monday that he would not “pre-empt what’s in the Budget” when asked whether the government will extend the LMITO.

“When we introduced the low and middle income tax offset it was in response to the particular economic circumstances we faced at the time,” he said.