I’ve seen a few people parrot the line that the increase in the tax-free threshold that will take effect from 1 July this year isn’t “real”, because it involves a reduction in the Low Income Tax Offset (LITO).

Like most myths, this has a little bit of truth to it.

While references to ‘tripling the tax-free threshold’ are technically correct,  the effective threshold (taking into account the LITO) is only going from $16 000 to $20 542. However, while that might sound less impressive and is certainly harder to convey in a sound bite, the increase in the tax-free threshold will still deliver a significant tax cut to low-income earners.

In fact, the new tax scales will take the effective tax-free threshold to its highest level on record (the ATO historical tables only go back to 1983, frustratingly).

 Effective tax-free threshold since 1983-84, in constant 2011 dollars

Not only will the real effective threshold be higher than ever, but the 2012 change represents the largest single-year increase in the effective threshold. The second largest increase came with Wayne Swan’s first budget, in 2008-09.

Change in real effective tax-free threshold on previous year 

Even if the effective threshold wasn’t changing at all – if the rise in the statutory threshold was just replacing the LITO – this would still be a positive reform in a lot of ways. A higher statutory tax-free threshold means more money in the pockets of low-income earners each week, rather than the LITO system which means that they have to wait until tax time to receive half of the LITO benefit.

In short, the change in the tax scales will deliver a meaningful benefit to those on low incomes.

Note: Effective TFT = statutory TFT + (LITO amount/lowest MTR).