How could the latest Budget impact your tax return?

While the 2022-23 Federal Budget was light on changes, there may be ways to maximise your  tax refund and take advantage of increased flexibility.

There were no changes announced to individual income tax rates in the 2022–2023 Federal Budget¹. But that doesn’t mean you can’t make the most of the one-off payments to help to offset the increased cost of living.

A number of factors are putting upward pressure on the cost of living in Australia, including the pandemic, conflict in the Ukraine and extreme weather events across the country.

Over the last 12 months, the Consumer Price Index (CPI) – the percentage change in the price of a basket of goods and services consumed by a household – has grown to 5.1% pa, compared to 1.1% pa in the previous 12 months². Essentially, this means everyday expenses are on the rise.

The Federal Budget³, released on 29 March 2022, announced steps to support Australian households, through measures including a cut to the fuel excise, extended relief for retirees and a one-off cost of living payment to millions of Australians. It also includes increased flexibility for young families and retirees.  

Low, medium and fixed-income taxpayers

The latest Budget has offered three tax-saving measures for those who need them the most:

LMITO increases

An offset or rebate reduces your amount of tax payable – a pure reduction in your tax bill. Australia’s low and middle-income tax offset (LMITO) benefits individuals making less than $126,000. Payable from 1 July 2022, individuals will now be able to offset up to $1500 via their tax return, an increase of $420 from $1080. This is a one-off increase⁴.

Medicare levy exemption

The Medicare levy is a 2% pa levy that most Australians pay above their normal income tax, to support the medical system⁵. While low-income taxpayers continue to be exempt from paying the Medicare levy, the threshold for this exemption has increased slightly. That’s good news at tax time for those whose incomes are approaching the exemption limit.

One-time $250 cost of living payment

Individuals have been given a tax-free payment of $250 if they receive specified social security payments or concession cards⁶. This includes retirees and those of working age. This is a cost of living payment for those who can least afford current inflation pressures, and has no impact on your tax return.  

Superannuation minimum withdrawal temporary reductions

Anyone drawing on their super to provide an income is obliged to withdraw at least a minimum percentage of their remaining balance each year. That percentage increases with age. In years when markets are down, this can have a negative impact on their remaining balance, and many retirees may prefer to weather the storm and hold their super investments rather than sell them.

In recognition of high market volatility, the Government has reduced the minimum thresholds this year. Retirees are not required to draw down their super funds as quickly as they normally would⁷. Bottom line – this year you have the choice to cut back and ride out (potentially) stormy markets. To decide what to do, consider the cost of selling your super investments at a loss versus your ability to live off less income than you would normally be allowed to draw.

Paid parental leave flexibility

Retirees aren’t the only ones with more options thanks to Budget changes this year. Young families with a newborn or recently adopted child have a wider range of decisions to make. 

Parental Leave Pay is a guaranteed Government payment for a specified period of time, providing one or both parents with a minimum wage following the birth of a child⁸.

The previous scheme gave one parent up to 18 weeks’ paid leave, and the other parent/carer up to two weeks. The new scheme provides a pool of 20 weeks to allocate and the parents get to choose who takes the leave.

In addition, the full household income⁹ now counts towards the income qualification.

As you consider the right mix of paid parental leave between partners in your family, remember anyone who takes leave will have their income reduced to the minimum wage for that period, but this reduction will come with a commensurate lower tax bill this end of financial year (EOFY).

First-time home buyers

The Government provides a limited number of home mortgage guarantees enabling a first-time home-buyer to avoid paying commercial lenders’ mortgage insurance. In another expression of support for young families, the Government is expanding the first-time Home Guarantee Scheme from 1 July 2022. There will be 35,000 annual guarantees available (up from 10,000), plus an additional 10,000 regional home guarantees for qualifying properties and 5000 more for qualifying families¹⁰.

Fuel excise reduction

The biggest CPI increase in the year ending December 2021 was fuel, with prices growing 11% pa over the previous 12 months¹¹. Since then, fuel prices have spiked to record highs across the country – the Australian Institute of Petroleum estimates they rose nearly 25% pa between April 2021 and April 2022¹².

It’s a noticeable hit to many hip pockets, and the Government has responded by cutting fuel excise (customs duty rates) until 28 September 2022. This represents immediate savings in the amount of 22 cents per litre – or $300 for an average household over a six month period¹³.

If you’re someone who deducts fuel costs, and you were counting on a much larger deduction due to much higher fuel prices, then there’s good news and bad news – you may not have to pay as much for fuel as you expected, but that means you won’t be deducting as much. Your tax bill may be a bit more than you budgeted.

Pharmaceutical benefits

The Pharmaceutical Benefits Scheme provides safety-net thresholds for those who use a lot of prescription drugs. Essentially this is a cap on how much you have to pay out of pocket for your medicine, above which the Government will cover all costs. In this Budget, the Government is lowering the cap by 12 prescriptions for concession holders and by two for others¹⁴. This means anyone with significant pharmaceutical needs will have a little more in their pocket.  

Claiming RAT tests

Speaking of reduced medical expenses, remember those $30 rapid antigen tests (RAT) you had to purchase in order to go to work last year? The Government now considers COVID-19 tests required for the workplace to be deductable. Make sure you hang on to your receipts when you lodge your tax return¹⁵.

Knowledge is power

As always, EOFY tax time is an opportunity to consider not only your best strategies for refund, but your overall financial position. This year, the Government’s Budget changes, properly understood, give you the option to improve both.

¹ Australian Taxation Office: Individual income tax rates
² Australian Bureau of Statistics (March 2022): Consumer Price Index, Australia
³ Budget 2022-2023 (29 March 2022): Australia’s plan for a stronger future
⁴ Australian Taxation Office: Low and Middle Income Tax Office Increase
⁵ Services Australia: Medicare and tax
⁶ Services Australia: Who can get it
⁷ Australian Super: Minimum drawdown rates
⁸ Parliament of Australia: Changes to the Paid Parental Leave Scheme
⁹ Parliament of Australia: Changes to paid parental leave scheme
¹⁰ Treasurer of the Commonwealth of Australia: 2022-23 Budget backs aspiring homeowners
¹¹ Australian Bureau of Statistics (March 2022): Consumer Price Index, Australia
¹² Australian Institute of Petroleum (17 April 2022): Weekly petrol prices report
¹³ Budget 2022-2023: Fuel Excise
¹⁴ Australian Government Department of Health: The Pharmaceutical Benefits Scheme
¹⁵ Australian Taxation Office: Deductibility of COVID-19 tests