Common tax questions during tax season

With the end of the financial year now been and gone, if you haven’t yet had a chance to get your tax affairs in order, we’ve put together a list of the most frequently asked questions or misunderstood elements of our tax system.

Low and Middle Income Tax Offset

The Low and Middle Income Tax Offset (LMITO) has been a point of misconception for many taxpayers. This is mostly thanks to politicians using it as a political football in recent elections and the media promoting it as a cash-back refund for all.

The real intention of this offset was to help ease the pain of bracket creep as we transition towards new marginal tax rates in the 2025 financial year.

LMITO, as its name suggests, is a tax offset designed to reduce income tax payable by low to middle income earners.

The offset is calculated based upon your total taxable income for the year (inclusive of wages, investment & business income). If your taxable income is below $126,000, then you will be entitled to some or all of the LMITO, with the maximum offset for the year of $1,500 applicable to those earning between $48,000 and $90,000.

An important distinction, and a large part of the confusion, is the fact that this offset is non-refundable.

The simplest explanation of this is a scenario where a taxpayer earned $18,000. Whilst you may be eligible for a LMITO offset of $675, as the tax payable on an income of $18,000 is already nil, there is no tax available for the offset to reduce. Therefore, because the offset is non-refundable, the ‘unused’ balance of $675 does not increase the tax refund.

In an idealistic scenario where a taxpayer is earning wages between $48,001 and $90,000, has no other income or deductions, and their employer is withholding taxes correctly, then yes, you can expect a larger refund than usual as a result of LMITO – however, it is not as simple as the media would have you believe.

2022FY Low and Middle Income Tax Offset

Temporary Full Expensing

The Temporary Full Expensing (TFE) rules were introduced due to COVID-19 to help stimulate the economy and may possibly be the most well-promoted piece of tax legislation ever, thanks predominately to car and machinery dealers!

Another favoured campaigning tool of political candidates, this legislation is designed to encourage businesses to invest in new plant and equipment by providing an accelerated tax deduction.

There are quite a few misconceptions surrounding TFE. Probably the most common is that electing to use the full expensing method is always going to provide the most favourable tax outcome. This is far from the case as there are many variables altering its effectiveness - mainly, your business structure, current, and future taxable income, and plan for when you eventually dispose of the assets.

Given TFE doesn’t increase the total tax deduction available, it just alters the timing, it is imperative that business owners take a long-term view when opting in, as a marginal short-term tax benefit this financial year could be very quickly offset in future years as you have no depreciation to claim.

Another important point to clarify, with respect to this offset, is that it’s only available to business operators - individuals working for wages are still subject to an immediate deduction limit of $300 per item.

Superannuation contributions

As we transition back towards semi-normality after years of COVID-19-induced lockdowns and instability, many of us are looking for ways to safeguard our retirement.

With that in mind, it's always surprising how many people are unaware of changes that have been made to simplify and maximize the number of tax-deductible superannuation contributions individuals can make.

The concessional contribution cap has been increased to $27,500 for the 2022FY, and over the last few years, the ATO has reduced restrictions as to who can make and claim tax deductions for superannuation contributions, making it easier than ever to top up your superannuation balance and claim a tax deduction along the way.

If you happen to have made a large capital gain or received a large end-of-year bonus, then you may want to seek tax and financial advice as to whether you could make use of the carry forward concessional contribution rules to help offset this additional income.

The carry forward rule allows those with total superannuation balances less than $500,000 to catch up on previously unused tax-deductible superannuation contributions (up to 5 years) to claim a larger deduction in the current income year – to help offset that capital gain or bonus.

Hopefully, this has helped to clarify a few of the more misunderstood or forgotten changes that have been made to the taxation system in recent years and inspires you to spend a rainy weekend taking stock of your financial position.

If you need assistance with your tax affairs, please reach out to your local RSM adviser today.