House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Personal tax rates and low-income tax offset

Outline of chapter

1.1 Schedule 1 to the Clean Energy (Income Tax Rates Amendments) Bill 2011 amends the Income Tax Rates Act 1986 to raise the tax-free threshold and adjust marginal tax rates from 1 July 2012 and again from 1 July 2015.

1.2 Schedule 1 to the Clean Energy (Tax Laws Amendments) Bill 2011 amends the Income Tax Assessment Act 1936 (ITAA 1936) to make corresponding adjustment to the low-income tax offset (LITO).

1.3 These amendments will roll most of the LITO into the statutory tax rates and thresholds, making the personal tax system simpler and more transparent and delivering tax cuts for taxpayers earning less than $80,000 per year.

Context of amendments

1.4 These amendments give effect to the personal income tax cuts announced by the Prime Minister in Securing a clean energy future : the Australian Government's climate change plan , on 10 July 2011.

1.5 These amendments improve the simplicity and transparency of the personal income tax system, by increasing the tax-free threshold and rolling most of the LITO into the statutory rates and thresholds.

1.6 Part I of Schedule 7 to the Income Tax Rates Act 1986 sets out the personal income tax rates and thresholds that apply to the taxable income of individuals who are Australian residents for taxation purposes.

1.7 Section 159N of the ITAA 1936 provides for the LITO for certain low-income taxpayers. The LITO targets tax relief to low- and middle-income individuals by raising their effective tax-free threshold.

Summary of new law

1.8 Part 1 of Schedule 1 to the Clean Energy (Income Tax Rates Amendments) Bill 2011 and Part 1 of Schedule 1 to the Clean Energy (Tax Laws Amendments) Bill 2011 will amend the Income Tax Rates Act 1986 and the ITAA 1936 respectively so that from 1 July 2012:

•

the tax-free threshold will rise from $6,000 to $18,200 and the LITO will be reduced from $1,500 to $445, meaning low-income earners receive an effective tax-free threshold of $20,542;

•

the first marginal tax rate will be increased from 15 per cent to 19 per cent, and will apply to that part of taxable income that exceeds the tax-free threshold but does not exceed $37,000, and the withdrawal threshold for the LITO will increase from $30,000 to $37,000 aligning the effective marginal tax rate and the statutory rate for taxable incomes within this range; and

•

the second marginal tax rate will be increased from 30 per cent to 32.5 per cent, and will apply to that part of taxable income that exceeds $37,000 but does not exceed $80,000, and the withdrawal rate for the LITO will be reduced from 4 per cent to 1.5 per cent, with the benefit fully withdrawn at $66,667, more closely aligning the effective marginal tax rate and statutory rate for taxable income between $37,000 and $66,667.

1.9 Part 2 of Schedule 1 to the Clean Energy (Income Tax Rates Amendments) Bill 2011 and Part 2 of Schedule 1 to the Clean Energy (Tax Laws Amendments) Bill 2011 amends the Income Tax Rates Act 1986 and the ITAA 1936 respectively so that from 1 July 2015:

•

the tax-free threshold will increase from $18,200 to $19,400 and the LITO will be reduced from $1,500 to $445, meaning low-income earners receive an effective tax-free threshold of $20,979; and

•

the second marginal tax rate will increase from 32.5 per cent to 33 per cent, and will apply to that part of taxable income that exceeds $37,000 but does not exceed $80,000, and the withdrawal rate for the LITO will be reduced from 1.5 per cent to 1 per cent, with the benefit fully withdrawn at $67,000.

Detailed explanation of new law

Clean Energy (Income Tax Rates Amendments) Bill 2011

1.10 The amendments to the Income Tax Rates Act 1986 , together with changes to the LITO, deliver tax cuts to low- and middle-income earners and better align statutory and effective marginal tax rates. The personal income tax rates and thresholds for taxpayers are summarised for resident taxpayers in the table below:

1.11 From 1 July 2012, the 'tax-free threshold' will be defined at $18,200 in subsection 3(1), and the first two marginal tax rates in Part I of Schedule 7 will be increased to 19 per cent and 32.5 per cent. [ Schedule 1, items 1 and 3 to 5 of the Clean Energy ( Income Tax Rates Amendments ) Bill 2011 ]

1.12 From 1 July 2015, the 'tax-free threshold' will be defined at $19,400 in subsection 3(1), and the second marginal tax rate in Part I of Schedule 7 will be increased to 33 per cent. [ Schedule 1, items 7 and 8 of the Clean Energy ( Income Tax Rates Amendments ) Bill 2011 ]

1.13 From 1 July 2012, the arrangements to pro-rate the statutory tax-free threshold for individuals and trustees who are residents for taxation purposes for part of the year in subsections 20(1) and (2) will be amended to ensure they receive appropriate assistance for the impact of a carbon price through the personal tax system.

1.14 From 1 July 2012 part-year residents and trustees will be able to access a tax-free threshold of at least $13,464. Their access to the remaining $4,736 of the full tax-free threshold will be pro-rated.

1.15 From 1 July 2015 part-year residents and trustees will be able to access a tax-free threshold of at least $14,664. Their access to the remaining $4,736 of the full tax-free threshold will be pro-rated. [ Schedule 1, item 2 of the Clean Energy ( Income Tax Rates Amendments ) Bill 2011 ]

Clean Energy (Tax Laws Amendments) Bill 2011

1.16 The amendments to section 159N of the ITAA 1936, which sets out the arrangements for the LITO, are summarised in the table below:

1.17 From 1 July 2012, individuals will be entitled to receive the LITO if their taxable income is below $66,667. The maximum value of the LITO will be reduced to $445 and it will be phased out at the rate of 1.5 cents for every dollar of taxable income over $37,000. [ Schedule 1, items 1 and 2 of the Clean Energy ( Tax Laws Amendments ) Bill 2011 ]

1.18 From 1 July 2015, individuals will be entitled to receive the LITO if their taxable income is below $67,000. The maximum value of the LITO will be reduced to $300 and it will be phased out at the rate of 1 cent for every dollar of taxable income over $37,000. [ Schedule 1, items 4 and 5 of the Clean Energy ( Tax Laws Amendments ) Bill 2011 ]

Application and transitional provisions

Clean Energy (Income Tax Rates Amendments) Bill 2011

1.19 The amendments in Part 1 of Schedule 1 apply to assessments for the 2012-13 year of income and later years of income. [ Schedule 1, item 6 of the Clean Energy ( Income Tax Rates Amendments ) Bill 2011 ]

1.20 The amendments in Part 2 of Schedule 1 apply to assessments for the 2015-16 year of income and later years of income. [ Schedule 1, item 9 of the Clean Energy ( Income Tax Rates Amendments ) Bill 2011 ]

Clean Energy (Tax Laws Amendments) Bill 2011

1.21 The amendments in Part 1 of Schedule 1 apply to assessments for the 2012-13 year of income and later years of income. [ Schedule 1, item 3 of the Clean Energy ( Tax Laws Amendments ) Bill 2011 ]

1.22 The amendments in Part 2 of Schedule 1 apply to assessments for the 2015-16 year of income and later years of income. [ Schedule 1, item 6 of the Clean Energy ( Tax Laws Amendments ) Bill 2011 ]