Tax offset loophole will benefit high income earners with tax cut of $1080

People earning over $126,000 can “manipulate” the system to become eligible for the tax break, while low income earners face missing out.

Millions of low and middle income earners could escape a tax hike in the coming months, with the $1080 tax offset slated to continue for another 12 months.

More than 10 million Aussies were facing the possibility of taking home less pay next financial year as the $1080 tax offset was due to come to an end.

Senior government sources told the Herald Sun the budget will deliver extra relief to small and medium income workers and ensure their take home pay isn’t hit, at a cost of about $7 billion.

But accountant Ben Johnston told news.com.au there is a “big flaw” in the offset system, which essentially allows high income earners to game the system, while low income earners miss out.

He said the government has never fixed a problem with the scheme, which allows high income earners to access the tax offset by salary sacrificing and lowering their wage.

The tax cut provides up to $255 for those on less than $37,000, which increases to $1080 for about 3.4 million Australians earning $48,000 to $90,000. The offset then phases out for workers earning up to $126,000.

A salary sacrifice arrangement is when you agree to receive less take-home income from your employer in return for benefits, which are paid out of your pre-tax salary reducing the amount of income tax you pay.

“Say someone salary sacrifices to the full $25,000 for superannuation and has a salary package for their vehicle and private health insurance, it could make their salary go from $130,000 to $90,000 and when they were previously entitled to no offset, they would now entitled to the full $1080,” the managing director of Johnston Advisory said.

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Nurses could be one of the key workers to miss out on the extra money. Picture: iStock

But the system is also “unfair” to essential workers, who are “already arguably underpaid” for what they have to do, but use salary packaging and fringe benefit tax exemptions to boost their pay. He said taking advantage of those tax breaks could push them below the threshold to score the offset money, Mr Johnston said.

It could impact a number of sectors too including hospital staff and charity and welfare workers, who often push their pay packets down to the $20,000 to $25,000 mark, he added.

“It’s very common for those type of workers to salary package their pay. So it’s pretty common for nurses to have superannuation contributions, credit card debt or even wedding expenses to be paid out of their pre tax salary meaning their income goes from $60,000 to $30,000,” he explained.

“And sure they have had tax relief from that, but that’s besides the point, as they are only getting tax relief as the government acknowledges that arguably they are being paid lower for the services they do and to then miss out on offset to me seems unfair. It makes them ineligible and they get nothing or the bare minimum of $250.

“This has been an issue from the very start and it doesn’t seem they are going to address it again even though it’s a preliminary announcement at the moment.”

A spokesperson for the Treasurer Josh Frydenberg said the government doesn’t comment on budget speculation.

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Ben Johnston has said the tax offset system has ‘big flaws’. Picture: Supplied

Mr Johnston has called for the system to be based on people’s adjusted taxable income, which takes into account salary packaging,

“For things like accessing family tax incomes, it’s all based on adjusted taxable income to stop people trying to distort their true income, but the government is ignoring income tax adjustments when it comes to the offset, which is inadvertently giving higher income earners access to more of it and lower income earners miss out potentially,” he said.

“It’s unfortunate as the people that the tax offset sets out to achieve to benefit are possibly ones that are missing out, as they are in the clear income brackets where people need it most, and people on higher incomes are able to access it by being able to manipulate their taxable incomes.”

The government’s potential turnaround on tax hikes comes after research from Bankwest Curtin Economics Research Centre revealed if the tax offset does come to an end then millions of people will be worse off, even after the promised tax cuts in the 2024-25 financial year kick in.

For example, a person earning $80,000 will take home a net income of $63,013 this financial year but next year that is set to fall to $61,933. This will increase to $62,808 in 2024-25 when the new tax cuts kick-in.

In comparison, a person on $250,000 will pay more than $9000 less in tax in the 2024-25 financial year than they did in 2020-21.