Low Income Tax Offset (LITO)-Australian Taxation Office

What is Low Income Tax Offset (LITO)?

Low income tax offset (LITO) is linked to the minimum amount (AUD$ 20,453) which working Australian residents need to earn, to make them liable to pay income tax.

The coalition government, has in its 2019 Federal Budget, proposed an increase in the low income tax offset (LITO) threshold amount from 1 July 2022.

The proposal has recently been passed by the parliament and is expected to become legislated soon.

Low Income Tax Offset (LITO) Amount

If you earn up to AUD$ 20,452 during the income year than you are not required to pay any income tax.

The provisions pertaining to LITO were introduced by the government in 1993.

The main objective behind this was to provide relief to low income earners by allowing them to reduce the amount of income tax they are liable to pay during the income year.

However low income tax offset amount cannot be used by taxpayers to pay their Medicare Levy or to generate a tax refund.

Eligibility for Low Income Tax Offset (LITO)

Your eligibility to benefit from low income tax offset depends on the amount of taxable income you earn during the income year. Accordingly if you earn;

• Taxable income less than AUD$ 37,000, you are entitled for full amount of LITO i.e. AUD$ 445.
• Taxable income less than AUD$ 66,667 but greater than AUD$ 37,001, you are entitled for partial amount of LITO.

For Example

You earn taxable income amounting to AUD$ 22,398 during the income year 2018-19. As your taxable income is less than AUD$ 37,000, you are entitled to low income tax offset (LITO) of AUD$ 445.

However first your taxable income would be reduced by the amount of tax free threshold. Your tax liability would be computed in the following manner.

Step 1: Compute taxable income i.e. Taxable income less tax free threshold

22,398 – 18,200 = AUD$ 4,198

Step 2: Compute tax amount i.e. Taxable amount x Tax rate

4,198 x 19% = AUD$ 798

Step 3: Compute adjusted tax amount i.e. Tax amount computed in step 2 less LITO

798 – 445 = AUD$ 353

In the given example you would be liable to pay tax amounting to AUD$ 353.

You would also be entitled to a Medicare levy exemption as the taxable income is equal to AUD$ 22,398.

Low Income Tax Offset (LITO) Amounts from 1 July 2022

Low Income Tax Offset (LITO) threshold from 1 July 2022 would be as follows.

The proposal has already been passed by the parliament and Senate on 4^th July 2019.

Minors and Low Income Tax Offset (LITO)

Low Income Tax Offset (LITO) does not apply to unearned income received by minors i.e. individuals below the age of 18.

There can be different sources from which minors can derive unearned income such as gifts from parents and inheritance.

This is done with the objective of discouraging the transfer of income from taxpayers to minors without paying correct income tax on such income.

The tax threshold and rates of tax on unearned income of minors is as follows.

Circumstances Where the Rates of Tax on Minor Do Not Apply

There might be circumstances where the income of minors may be taxed by ATO at rates of tax for adults.

In such cases minors would be eligible for deductions such as low income tax offset and tax free threshold.

There are no specific conditions where such rules apply, but they may be determined on the basis of the situation of person or the type of income derived.

Following are some of the situations where minors are taxed at rates of tax for adults

• Minors working full time.
• Minors had worked 3 months full time during the current income year, and intend to work full time during most of the next income year. Furthermore such minors would have no intention to study full time in the next income year.
• Minors are permanently blind or suffer from permanent disability for an extensive period.
• Minors are entitled for double orphan pension, provided that they do not receive financial assistance from relatives.
• Minors were unable to work full time due to permanent physical or mental disability and do not receive no financial assistance from relatives.
• etc….

Following are some of the types of income where minors are taxed at rates of tax for adults

• Income from employment.
• Income from deceased estate.
• Income in the form of damages for personal injury.
• Income from business.
• Income from partnership where the minor was active partner during the income year.
• Superannuation fund benefits.
• Compensation or pension fund benefits.
• etc….

For Example

You are 16 years old Australia resident and earn AUD$ 20,000 exempt income and AUD$ 5,000 in other income during the income year 2018-19.

Assuming that your income or situation falls in either of the scenarios mentioned above, your tax computations by ATO would be as follows.

Step 1: Compute taxable income i.e. (Exempt Income less tax free threshold) plus other income

(20,000 – 18,200) + 5,000 = AUD$ 6,800

Step 2: Compute tax amount i.e. Tax on exempted income + Tax on other income

(1,800 x 19%) + (5,000 x 45%) = AUD$ 2,592

Step 3: Compute adjusted tax amount i.e. Tax amount computed in step 2 less LITO

2,592 – 445 = AUD$ 2,147

In the given example you would be liable to pay tax amounting to AUD$ 2,147.

For Clarification

• Do not confuse the concept of low income tax offset (LITO) with low and middle income tax offset (LMITO).
• Refer to the principles of tax free threshold.
• Refer to the concept of Medicare Levy.