2013 changes to the tax free threshold – how much tax will I save?


2013 tax free threshold changes

 There has been an increase to the tax free threshold from $6,000 to $18,200 for the 2013 tax year (starting from 1 July 2012). Also the previous 15% rate (above $6,000) has increased to 19% (above $18,200).

Q. Wow! Does that mean next year I’ll save like 15% tax in 2013 for the amounts in between $6,001-$18,200?A. No. Not quite. In practice, this won’t save you much tax because to counter the tax threshold increase the Low Income Tax Offset (“LITO”) has reduced from $1,500 to $445.

Q. What is the Low Income Tax Offset?
A. The Low Income Tax Offset reduces your tax payable. It came into play in 2007. So in reality, the amount you can earn tax free has increased from $16,000 (2011 & 2012) to $20,542 (2013). See below for examples of how this works.

Q. But I will pay less tax in 2013 won’t I?
A. Yes, those earning about $20,000-$25,000 should ‘save’ the most tax (saving up to $700 tax in 2013 than 2012).

From $30,000 – $66,667 the saving will be $303.
Above $80,000 the $303 gradually reduces and is only $3 over the year for those earning above $180,000.

Those earning below $16,000 won’t pay any tax in 2011 or 2012 and so will continue to pay no tax in 2013 – so won’t pay ‘less’ tax (as you can’t pay less than nothing).

Q. How much could I earn in 2011 and 2012 without paying tax?
A. $16,000 – The maximum low income tax offset of $1,500 in 2011 and 2012 meant that you could earn $16,000 and not pay any actual tax.

Tax on $16,000 is $1,500 ($16,000-$6,000 tax free = $10,000 x 15%). The $1,500 tax on taxable income would be reduced by the LITO of $1,500 which means no ‘actual tax’.

Q. How much can I earn in 2013 without paying tax?
A. $20,542 -The maximum low income tax offset of $450 in 2013 means that you can earn $20,542 and not pay any actual tax.

Tax on $20,542 is $450 ($20,542-$18,200 = $2,342 x 19% = $450 tax on taxable income) less LITO of $450 = no actual tax.

Q. What is this ‘actual tax’ I pay?
A. The actual tax you pay is calculated by:
1. Tax on taxable income PLUS
2. Medicare levy MINUS
3. Tax offsets like the Low Income Tax Offset (“LITO”)
1 plus 2 minus 3 = Actual Tax you pay

Q. I didn’t know anything about the Low Income Tax Offset – can I still get it?
A. The tax office calculates your Low Income Tax Offset automatically. If you are eligible for any Low Income Tax Offset the ATO would have calculated it and included it on your notice of assessment. It is also calculated on E-tax.

Q. Has the government done me a massive favour – an extra $4,542 tax free?
A. Yes, they have – though remember that inflation means that wages and the cost of living goes up over time.

Q. But I don’t pay tax – I get a refund every year…
A. Of course the ‘actual tax you pay’ is reduced by any tax paid or credits during the year. Based on how much your employer withholds (called PAYG withholding), a lot of workers get a tax refund when they lodge their tax return.

But the actual tax you pay is how much of your money is going to the tax man.

Posted in Tax
  • Deb

    I haven’t applied for the tax free threshold and pay more tax during the year, and I have done this for several years?

    Will there be a higher tax refund for my 2013 tax return than I’ve had previously, where there are no changes to my circumstances from 2012?

  • scottkay

    Hi Deb
    It depends on what you earn and what your employer withholds.

    So I can’t really say “in principle” without the actual figures.

    But basically you might get a slightly higher refund in 2013 than in 2012 (all thing being equal which they often aren’t).
    If you earn more between $30k-$80k in the year you will pay $303 less tax overall. If your employer is using the tax tables, I think about 75% of this reduction in tax will be reduced from your PAYG withholding, with 25% ($75.75) being an extra tax refund.
    But of course if you have other income (like interest for example) then the numbers will change.

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