This empty $1,080 tax break must have ended years ago – but has become difficult to stop

We will find out whether we will lose a tax advantage of up to $1,080 each year that we have earned. Before next month’s budget, Treasurer Josh Frydenberg said that he had not “taken any final judgment” on the A$7.8 billion low and middle-income tax offset, which the federal government funds.

He also claims that it was never meant to be “a permanent element of the tax system,” which is correct in certain respects.

He could have added that it is badly constructed, that it was created because it no longer existed, that it was expanded for a purpose that made no sense, and that it is now unable to be abolished without imposing a “pay cut” on the individuals affected.

LMITO (low and middle-income tax offset) was established by Scott Morrison in his last budget as Treasurer before becoming Prime Minister in 2018. It is a tax break for low and middle-income earners.

The government’s experience with Robodebt and its ill-fated effort to collect what is considered overpaid Centrelink payments had a significant role in creating its eccentric design.

A flawed tax break, made in Robodebt’s shadow

As a result, Morrison was painfully aware of the distress caused by Robodebt, which is formally known as the online compliance intervention program – which many people forget he created in 2016 to ensure that “assistance users correctly report assets and investments.”

Robodebt issued what seemed to request for the repayment to Australians who, in many cases, owed nothing at all. The government ended up having to pay out A$1.8 billion in settlements.

Founders of LMITO were motivated by a desire to reduce the complexity of Australia’s income tax system and avoid the faults of Robodebt.

Australia has five tax rates, including the zero percent initial tax rate, which applies to dollars earned up to $18,200. The other four rates are as follows: Generally, everything made beyond $18,200 up to a certain level is taxed at 19 percent; anything earned beyond that threshold is taxed at 32.5 percent; anything obtained beyond that threshold is taxed at 37 percent, and anything earned above $180,000 is taxed at 45 percent.

Morrison requested to eliminate one of the thresholds introducing the 37 percent tax rate, leaving the tax scale with just three rates above zero: 19 percent, 32.5 percent, and 45 percent. Morrison was successful in his request.

The cost would be high, rising to $24.6 billion per year in the worst-case scenario. As a result, the highest-income Australians earning more than $180,000 would get 44 percent of the benefit by that time.

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Part one of a three-part program

As a result, Morrison completed it in parts. These proposals would provide tax reductions for moderate and low-income people. It would be available only to taxpayers earning up to $125,333 per year in income.

Specifically, in 2022-23, the second would raise two thresholds: 32.5 percent would be eligible for $41,000 instead of $37,000, and 37 percent would be eligible for $120,000 instead of $90,000.

In addition, the LMITO tax advantage would be eliminated. It would be superfluous since everyone who received it would get the same amount from stage two.

The third and final step, which would be 2024-25, would flatten the tax scale.

However, the challenge with allocating a benefit to what Morrison termed “poor and medium incomes” was ensuring that it went exclusively to those who qualified for it in the first place.

What if one of them expected to make $100,000 but ended up earning $150,000 instead? As with Robodebt, they would have to be contacted by mail and asked to repay their money.

As a result, Morrison and the Treasury determined that claimants would not get their funds until they submitted their tax returns, demonstrating their earnings.

However, although the offset would begin in July 2018, the money would not reach the beneficiaries bank accounts for more than a year, not until the second half of 2019 — after their tax issues had been resolved.

Even though it is referred to as the low and middle-income tax offset, extremely low-income people would get nothing.

Those earning less than $18,200 did not qualify for a tax refund. The remainder would get up to $530 (eventually up to $1,080) — but only after they had completed their tax obligations.

Moreover, the tangled arrangement was only meant to persist for a few years until the second stage was introduced.

‘Not permanent,’ but difficult to stop

Stage two of the COVID response forward by Treasurer Josh Frydenberg in 2020 as part of the government’s COVID response. It was at this stage that the offset was no longer required.

Frydenberg, presumably to assert that “the biggest advantages would go to people with lower earnings,” prolonged the offset for another year.

Nonetheless, he extended it for another year in 2021, this time as a “stimulus measure,” although one that proved to be ineffectual. Something that does not affect bank accounts for more than a year is far from being instantaneous.

After giving us both the offset and stage two simultaneously and for two years, Frydenberg’s dilemma is that terminating the offset would be seen as a tax hike or “pay cut” intended at low and middle-income people, which would be unconscionable.

The timing is especially difficult because of a federal election scheduled for weeks following this year’s budget.

The offset, which costs the best part of $8 billion each year and is supplied when it is not required, is a contrived yearly bonus for everybody except the highest-earning Australians and is doomed to continue until someone can discover a way to stop it.

Similar to the immediate asset write-off for firms, which is always being extended because businesses would protest otherwise, there is a likelihood that the LMITO will be with us indefinitely as well.

Even though it is ill-suited, there is an unexpected advantage. According to the Tax Department, we have filed our taxes on time.