What Is the Low Income Tax Offset (LITO)?

The Low Income Tax Offset is a non-refundable tax offset designed to reduce the amount of income tax paid by low-income Australian residents. It was first introduced to ensure that low-income earners pay little or no tax on their first dollars of income above the tax-free threshold.

For FY 2025-26, LITO is especially valuable because the Stage 3 Tax Cuts reduced the second tax bracket rate from 19% to 16%. Combining this lower rate with the LITO offset means many low-income earners pay virtually no income tax at all.

The offset is non-refundable, which means it can only reduce your tax liability to zero — you won't receive any excess as a cash refund. However, any remaining LITO entitlement is applied before the Medicare Levy, so it can significantly reduce your overall tax bill.

FY 2025-26 LITO Rates and Thresholds

The ATO has maintained the same LITO structure introduced alongside the Stage 3 Tax Cuts. The maximum offset of $700 applies to taxpayers earning $37,500 or less, after which it gradually phases out.

The phase-out rate of 5% (or 5 cents per dollar) means the offset reduces by $5 for every $100 of taxable income above $37,500. At $66,667, the offset reaches zero.

How to Calculate Your LITO Entitlement

Calculating your LITO is straightforward once you understand the formula. Here is the step-by-step approach you can use to work out your entitlement.

Step 1: Determine your taxable income for FY 2025-26. This is your assessable income minus any allowable deductions.

Step 2: If your taxable income is $37,500 or less, your LITO is the maximum $700. No further calculation is needed.

Step 3: If your taxable income is between $37,501 and $66,667, use this formula: LITO = $700 – [(taxable income – $37,500) × 0.05]. The result is your offset amount.

Step 4: If your taxable income exceeds $66,667, your LITO is $0.

LITO Combined With the Tax-Free Threshold

One of the most important practical effects of LITO is how it interacts with the $18,200 tax-free threshold. When combined, these two provisions mean many low-income earners pay zero income tax on significantly more than $18,200.

Here is how the effective tax-free amount works for different income levels in FY 2025-26:

As the table shows, someone earning $22,000 owes $608 in gross income tax, but LITO completely eliminates that amount. This effectively raises their tax-free threshold to about $22,000. For full details on your specific situation, use our Take-Home Pay Calculator which automatically includes LITO in your calculations.

LITO vs LMITO: What's the Difference?

Many taxpayers confuse LITO with LMITO (the Low and Middle Income Tax Offset). These are different offsets with different eligibility rules and timeframes.

LMITO was a temporary offset that applied from FY 2018-19 through FY 2021-22. It provided up to $1,500 (in its final year) for low and middle-income earners but was not extended beyond 30 June 2022. LMITO no longer exists.

LITO is the permanent low-income offset that remains in place. It was modified alongside the Stage 3 Tax Cuts, with the maximum amount reduced from $1,645 (previous rate) to $700. The trade-off is that the lower 16% bracket rate means most low-income earners pay less tax overall despite the smaller offset.

If you see older articles or calculators referencing LMITO, they are likely outdated. For current tax calculations, always use FY 2025-26 data and the current LITO rates.

LITO and the Medicare Levy

LITO reduces your income tax liability, but the Medicare Levy is applied separately. The Medicare Levy is 2% of your taxable income, subject to certain low-income exemptions.

For FY 2025-26, the Medicare Levy low-income threshold is $27,222. If your taxable income is below this amount, you do not pay the Medicare Levy. Between $27,222 and $34,027, the levy applies on a sliding scale (shade-in). Above $34,027, the full 2% applies.

This means LITO and the Medicare Levy interact in important ways. A low-income earner with $25,000 in taxable income gets LITO reducing their income tax to near zero, and also qualifies for the Medicare Levy exemption because they are below the $27,222 threshold. Use our Medicare Levy Calculator to check your exact liability.

How Salary Sacrifice Affects Your LITO

Salary sacrificing into superannuation reduces your taxable income, which can increase or affect your LITO entitlement. If you earn $50,000 but salary sacrifice $10,000 into super, your taxable income drops to $40,000 — bringing you within range of a partial LITO offset.

However, salary sacrifice arrangements that reduce your taxable income for other purposes, such as HECS-HELP repayment calculations or superannuation contributions, do not always work the same way for offsets. The LITO is calculated based on your final taxable income after all deductions, so any salary sacrifice or deduction that lowers this figure can increase your LITO entitlement or bring you into eligibility.

Use our Salary Sacrifice Calculator to see how salary sacrificing affects your overall tax position, including LITO.

Do You Need to Claim LITO on Your Tax Return?

LITO is automatically calculated by the ATO when you lodge your tax return. You do not need to fill in a separate form or make a specific claim. The ATO applies the offset based on your taxable income.

When you lodge your return through myGov or with a tax agent, the ATO system calculates your entitlement. If you use registered tax preparation software, it should also calculate LITO automatically. However, it is always worth checking that the offset has been correctly applied, especially if your income is close to the $37,500 or $66,667 thresholds.

If you earn less than $66,667 and do not see LITO applied in your notice of assessment, contact the ATO or your tax agent to have the calculation reviewed.

Frequently Asked Questions

Can I claim LITO if I earn over $66,667?

No. LITO completely phases out once your taxable income reaches $66,667. If you earn $66,668 or more, you are not entitled to any LITO for FY 2025-26.

Is LITO refundable?

No, LITO is non-refundable. It can reduce your income tax liability to zero, but any excess LITO beyond your tax liability is not paid to you as a cash refund. For example, if your tax bill is only $500 and your LITO is $700, you pay nothing but do not receive the extra $200 as a refund.

Does LITO reduce my Medicare Levy?

No. LITO only reduces income tax, not the Medicare Levy. The Medicare Levy is calculated and applied separately. However, you may qualify for a Medicare Levy exemption or reduction based on low income.

Will LITO change in future years?

The government has confirmed the current LITO structure will remain for FY 2025-26. Starting from 1 July 2026, the 16% tax bracket rate will drop to 15%, and from 1 July 2027 it will drop to 14%. The LITO may be reviewed alongside these changes, but no specific adjustments have been announced at this time.

Does LITO apply to foreign residents?

No. LITO is only available to Australian residents for tax purposes. Foreign residents are taxed at different rates and do not qualify for the tax-free threshold or the Low Income Tax Offset.

How do I check if my LITO was applied correctly?

Check your ATO notice of assessment after lodging your tax return. It will show the amount of LITO applied. You can also check your myGov account. If you think an error has been made, contact the ATO or speak with a registered tax agent.