How you can take advantage of a major tax loophole to get the full $1080 cut on your return

An offset loophole could allow high income earners to get $1,080 back on their returns this year if the tax relief scheme is extended for 12 months as expected. 

The 10million Australian workers earning up to $126,000 were given tax cuts of up to $1,080 last year in the form of a low and middle-income tax offset to boost spending amid the Covid-19 pandemic.

That tax relief was due to expire on June 30, but senior government sources have said it could be extended for 12 months in May’s budget at a cost of $7billion. 

About 4.5million income-earners are entitled to the maximum offset, but tax experts said those earning above the threshold could ‘manipulate’ the system and receive the full $1,080 also if they chose to salary sacrifice to lower their taxable income.  

Millions of Australians may be able to take advantage of a tax loophole to get their hands on the full $1,080 offset as the tax cut is set to be extended for another year (workers in Sydney’s CBD pictured) 

But on the lower end of the scale salary sacrifice could have the opposite effect, with the offset shrinking to $255 for those earning less than $37,000 a year. 

For those earning $48,000 to $90,000 the offset is bumped up to $1,080 and gradually phases out for those earning up to $126,000. 

Johnston Advisory accountant, Ben Johnston, told news.com.au workers on higher incomes can take advantage of salary sacrificing which involves having money taken out from your pre-tax salary to go towards benefits.

This means you take home less income and therefore have to pay less income tax. 

The accountant said someone who was previously not entitled to the full $1,080 offset could salary sacrifice and reduce their pay so they can receive the amount.

But Mr Johnston said the loophole as a ‘big flaw’ and said it was ‘unfair’ for lower income workers such as nurses who commonly utilise salary packaging.

‘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 said.

The loophole could mean those on lower salaries like healthcare workers who utilise salary sacrificing may be unable to claim the full offset (stock image)

He said in order for the government to take into account if workers salary sacrifice, the offset should be based on adjusted taxable income.  

‘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.’ 

Parliamentary staff tasked with finalising the details of the Budget have been discussing the potential extension of the tax offset this week, a source told The Herald Sun. 

An Australian earning $80,000 a year took home $63,013 in 2020-21 but that figure would drop to $61,933 in 2021-22 if the tax offset is removed.   

This would increase to $62,808 in 2024-25 when a different round of tax cuts begin, cutting the number of tax brackets from five to four for the first time since 1984.

Federal Treasurer Josh Frydenberg has been tight-lipped when asked about the fate of the tax offset, saying only that the Government was ‘working to a set of priorities’.  

‘We’re in the middle of a pandemic, and we’re transitioning off emergency support to more targeted support. So we’ve got lots of pieces in the jigsaw operating,’ he said.

Mr Frydenberg will hand down the Budget on May 11. 

Higher income workers can take advantage of salary sacrificing to lower their income and income tax to be entitled for the tax offset (stock image of businessman)