When you lodge your Australian tax return, certain offsets can reduce the amount of tax you owe. One of the most commonly applicable for working holiday makers is the low income tax offset, known as LITO. It can reduce your tax payable by up to $700 per year and is applied when you lodge your return if you meet the income threshold.
What is the low income tax offset?
The low income tax offset is a tax reduction available to individuals whose taxable income falls below a set threshold. It directly reduces the amount of tax you owe rather than reducing your taxable income. If you owe $1,000 in tax and are entitled to a $500 LITO, you pay $500.
The maximum offset is $700, which applies to taxable income up to $37,500. For income between $37,500 and $45,000, the offset reduces gradually. For income above $66,667, no offset is available.
Can working holiday makers claim it?
This is where it gets nuanced. The LITO is available to individuals based on their income level, but there are specific rules around how it interacts with the working holiday maker tax rate. Whether it applies and in what amount depends on your specific income, visa status, and how your return is prepared.
A registered tax agent will assess your eligibility and apply the offset correctly. This is one of the reasons having a tax agent prepare your return can result in a better outcome than lodging yourself.
What is the difference between an offset and a deduction?
A tax deduction reduces your taxable income. If you earn $30,000 and claim $1,000 in deductions, you are taxed as if you earned $29,000. A tax offset directly reduces the tax you owe. If your tax bill is $4,500 and you have a $700 offset, you pay $3,800.
Offsets are generally more valuable than deductions of the same dollar amount because they reduce your tax bill dollar for dollar.
Can it be combined with other offsets?
Yes. The LITO can be combined with other offsets, including the small business tax offset if you also earned income under an ABN. Each offset is calculated separately and then applied to reduce total tax payable.
What if your income is very low?
If your taxable income is low enough that the offset would reduce your tax liability to zero, the remaining offset is not refunded. Offsets reduce your tax to zero at most. The refund you receive comes from the gap between tax withheld throughout the year and what you actually owe after all calculations.
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