House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 1 Personal income tax plan

Outline of chapter

1.1 Schedule 1 to this Bill amends the tax law to:

•

introduce the low and middle income tax offset to reduce the tax payable by low and middle income earners in the 2018-19, 2019-20, 2020-21 and 2021-22 income years; and

•

for 2022-23 and later income years, merge the low and middle income tax offset and the LITO into a more generous new low income tax offset.

1.2 Schedule 2 to this Bill amends the Income Tax Rates Act 1986 to progressively increase the income tax rate thresholds in 2018-19, 2022-23 and 2024-25.

1.3 Together these amendments reduce the income tax burden faced by all taxpaying individuals.

Context of amendments

Income tax rates for individuals and other entities

1.4 An entity's liability to pay income tax in Australia on a set amount of taxable income is calculated by reference to various rates and thresholds. As Australia has a progressive income tax system for individuals, higher rates of tax are payable by individuals as their income increases beyond particular thresholds.

1.5 Currently, section 12 of the Income Tax Rates Act 1986 provides that individuals and other entities not dealt with elsewhere in the Act must generally pay income tax at the rates set out in Schedule 7 to the Act. Under Schedule 7, Australian resident taxpayers are generally:

•

not subject to tax on the part of their ordinary taxable income that does not exceed $18,200 (the tax-free threshold);

•

subject to tax at a rate of 19 per cent on the part of their taxable income that exceeds $18,200 but does not exceed $37,000;

•

subject to tax at a rate of 32.5 per cent on the part of their taxable income that exceeds $37,000 but does not exceed $87,000;

•

subject to tax at a rate of 37 per cent on the part of their taxable income that exceeds $87,000 but does not exceed $180,000; and

•

subject to tax at a rate of 45 per cent on the part of their taxable income that exceeds $180,000.

1.6 Foreign resident taxpayers are subject to tax at a rate of:

•

32.5 per cent on the part of their taxable income that does not exceed $87,000;

•

37 per cent on the part of their taxable income that exceeds $87,000 but does not exceed $180,000; and

•

45 per cent on the part of their taxable income that exceeds $180,000.

1.7 Part III of Schedule 7 sets out special rules that apply to the income of working holiday-makers in Australia. Taxable income from these activities (subsequently referred to as working holiday-maker taxable income) is generally taxed at the tax rates for Australian residents, whether or not the individual is an Australian resident. However, working holiday-makers do not benefit from the tax-free threshold and the rate of tax that applies to income not exceeding $37,000 is 15 per cent.

Tax offsets

1.8 The income tax law provides for a number of tax offsets - reductions in the income tax otherwise payable by taxpayers that satisfy specified requirements. Many offsets are contained in Division 61 of the ITAA 1997.

1.9 Currently, section 159N of the ITAA 1936 provides a tax offset (referred to in the terminology of that Act as a rebate) for low income individuals (and certain trustees taxed in the place of these individuals) - more commonly known as LITO.

1.10 Taxpayers are entitled to this offset for an income year if during that income year their taxable income is less than $66,667 and they are an Australian resident. The amount of the offset (the amount by which a taxpayer's tax payable is reduced) is $445, reduced by 1.5 cents for every dollar of the amount by which the taxpayer's taxable income exceeds $37,000.

Summary of new law

1.11 Schedule 1 to this Bill amends the tax law to:

•

introduce the low and middle income tax offset to reduce the tax payable by low and middle income earners that are Australian residents in the 2018-19, 2019-20, 2020-21 and 2021-22 income years; and

•

replace the low and middle income tax offset and the LITO with the new low income tax offset for 2022-23 and later income years.

1.12 Schedule 2 amends the Income Tax Rates Act 1986 to make the following changes to the thresholds at which particular rates of income tax (ignoring the Medicare Levy) apply:

•

from the 2018-19 income year, the rate of income tax that applies to the amount of an individual's ordinary taxable income between $37,001 and $90,000 (rather than $87,000) is 32.5 per cent;

•

from the 2022-23 income year:

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the rate of tax that applies to the amount of an individual's ordinary taxable income between $18,201 and $41,000 (rather than $37,000) is 19 per cent; and

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the rate of tax that applies to the amount of an individual's ordinary taxable income between $41,001 and $120,000 (rather than $87,000 or $90,000) is 32.5 per cent;

•

from the 2024-25 income year:

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the rate of tax that applies to the amount of an individual's ordinary taxable income between $41,001 and $200,000 (rather than $87,000, $90,000 or $120,000) is 32.5 per cent;

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the rate of tax that applies to the amount of an individual's ordinary taxable income exceeding $200,000 (rather than $180,000) is 45 per cent; and

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the 37 per cent rate of income tax is abolished.

1.13 Equivalent changes will apply to other entities that are taxed like individuals as well as to the thresholds that apply to foreign residents and working holiday-makers.

Comparison of key features of new law and current law

Changes to tax offsets

Changes to income tax rate thresholds

Detailed explanation of new law

1.14 This Bill amends the income tax law to implement the Government's Personal income tax plan. The amendments provide tax relief and increase the rewards from work.

1.15 Broadly, there are two elements of the plan:

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the introduction of the low and middle income tax offset (in addition to the LITO) and the later replacement of both that offset and the LITO with the new low income tax offset; and

•

changes to the thresholds at which marginal income tax rates apply.

Tax offsets for low and middle income earners

1.16 Schedule 1 to this Bill amends the ITAA 1997 and ITAA 1936 to introduce the low and middle income tax offset and later replace both that offset and the existing LITO with the new low income tax offset.

Low and middle income tax offset

Entitlement

1.17 The low and middle income tax offset is available to individuals who are Australian residents during the 2018-19, 2019-20, 2020-21 or 2021-22 income years and have taxable income for that income year not exceeding $125,333. [Schedule 1, item 1, subsection 61-105(1) of the ITAA 1997]

1.18 The low and middle income tax offset is also available to trustees during the 2018-19, 2019-20, 2020-21 or 2021-22 income years if they are taxed on a share of the net income of a trust on behalf of an Australian resident beneficiary that is under a legal disability, provided the amount of that share does not exceed $125,333. [Schedule 1, item 1, subsection 61-105(2) of the ITAA 1997]

1.19 If a trustee is taxed in relation to the shares of multiple beneficiaries of the trust, the trustee is separately entitled to the offset in respect of each share of a beneficiary for which the trustee is taxed. For example, a trustee may be taxed on the shares of three beneficiaries in the net income of the trust. If the first beneficiary's share exceeds $125,333 while the other two do not, the trustee will not be entitled to the offset for the share of the first beneficiary but will be entitled to the offset for the share of the second and third beneficiary. [Schedule 1, item 1, subsection 61-105(3) of the ITAA 1997]

1.20 A beneficiary of a trust that benefits from the offset from multiple sources may be subject to additional tax to undo this benefit where, upon reconciliation the beneficiary has received a greater benefit than what would have been the case had the shares of the income of the trust or trusts been taxed in the hands of the beneficiary - see section 100 of the ITAA 1936.

1.21 The temporary offset is targeted to provide assistance to lower and middle income Australian taxpayers in the first four years of the Personal income tax plan. The offset is not available for entities with relevant income of more than $125,333.

1.22 The low and middle income tax offset operates in addition to the LITO. Taxpayers may be entitled to receive both tax offsets.

Amount

1.23 The amount of the offset available for a taxpayer depends on the relevant income of the individual or trustee in respect of the relevant individual for the income year, as set out in the following table:

Table 1.1 - Amount of the low and middle income tax offset

[Schedule 1, item 1, section 61-107 of the ITAA 1997]

1.24 For this purpose, the relevant income of the entity is the taxable income of an individual or the share of the net income of the trust on which a trustee is taxed on behalf of a beneficiary. [Schedule 1, item 1, subsection 61-107(1) of the ITAA 1997]

1.25 Effectively, the low and middle income tax offset provides the benefit of the Personal income tax plan to low and middle income earners prior to 2022-23. The offset tapers in for taxpayers earning above $37,000, providing some of the benefit that taxpayers will receive when the $37,000 income tax rate threshold is increased to $41,000 in 2022-23. The offset tapers out at a modest rate.

1.26 The amount of the offset is capped. The amount of the cap is the amount of tax payable by the entity that is not payable in relation to the unearned income of minors taxed under the integrity rules in Division 6AA of Part III of the ITAA 1936 (unearned income). This cap means that the offset is not available to reduce tax payable on such unearned income. [Schedule 1, item 1, subsections 61-107(2) and (4) of the ITAA 1997]

1.27 In some cases a taxpayer may be entitled to both the low and middle income tax offset and the beneficiary tax offset (see section 160AAA of the ITAA 1936). The beneficiary tax offset applies to reduce tax payable before the low and middle income tax offset. When working out the amount of the remaining tax payable that is payable on unearned income for the low and middle income tax offset, the beneficiary tax offset is treated as having reduced tax payable on unearned income to the extent possible - i.e. the beneficiary tax offset is treated as first reducing any tax payable that cannot be reduced by the low and middle income tax offset. [Schedule 1, item 1, subsection 61-107(3) of the ITAA 1997]

1.28 This effectively increases the taxpayer's cap for the low and middle income tax offset (by reducing the amount of tax payable that is attributable to unearned income) and maximises the amount of tax payable that is reduced by the two offsets.

1.29 The outcome of these restrictions is consistent with the rules that currently apply for the LITO - see subsection 159N(5) of the ITAA 1936.

Priority and withholding

1.30 The low and middle income tax offset is non-refundable and cannot be carried forward or transferred. Its priority in application is consistent with other tax offsets not given a specific priority - see item 20 of the table in subsection 63-10(1) of the ITAA 1997.

1.31 It is expected that the Commissioner of Taxation will not take the low and middle income tax offset into account when determining Pay-As-You-Go withholding schedules under section 15-25 in Schedule 1 to the Taxation Administration Act 1953.

New low income tax offset

1.32 The new low income tax offset replaces both the low and middle income tax offset and the LITO in the 2022-23 income year and later income years.

1.33 It serves the same function as the LITO but is more generous, ensuring that individuals are no worse off following the end of the low and middle income tax offset.

Entitlement

1.34 The new low income tax offset is available in the same circumstances during the 2022-23 income year and later income years as the LITO is for prior income years.

1.35 This means that the new low income tax offset is available to individuals who are an Australian resident during 2022-23 or a later income year if their taxable income for that income year does not exceed $66,667. [Schedule 1, item 1, subsection 61-110(1) of the ITAA 1997]

1.36 It also means that the new low income tax offset is available to trustees for 2022-23 or a later income year if the trustee is taxed on a share of the net income of a trust on behalf of a Australian resident beneficiary who is under a legal disability for that income year, provided the amount of that share does not exceed $66,667 (consequences may apply to a beneficiary that receives the benefit of the offset from multiple sources - see paragraph 1.20 above for more details). [Schedule 1, item 1, subsection 61-110(2) of the ITAA 1997]

1.37 If a trustee is taxed in relation to the shares of multiple beneficiaries of the trust, the trustee is separately entitled to the new low income tax offset in respect of the share of each beneficiary in the same way as is described in paragraph 1.19 above for the low and middle income tax offset. [Schedule 1, item 1, subsection 61-110(3) of the ITAA 1997]

Amount

1.38 The amount of the new low income tax offset available to a taxpayer for an income year depends on the relevant income of the individual or trustee for the income year, as set out in the following table:

Table 1.2 - Amount of new low income tax offset

[Schedule 1, item 1, section 61-115 of the ITAA 1997]

1.39 For this purpose, the relevant income of the entity is the taxable income of an individual or the share of the net income of the trust on which a trustee is taxed on behalf of a beneficiary. [Schedule 1, item 1, subsection 61-115(1) of the ITAA 1997]

1.40 Effectively, the amount of the new low income tax offset is $645 until an individual's taxable income exceeds $37,000, the threshold for the lowest personal tax rate to apply prior to 2021-22.

1.41 Once an individual's income exceeds $37,000 the amount of the offset is tapered at rates that ensure lower income individuals are no worse off as a result of the removal of the low and middle income tax offset, when taking into account the changes to thresholds for personal income tax. The initial taper rate of 6.5 per cent applies to incomes from $37,000 up to the threshold for the second marginal tax rate to apply from 2022-23 ($41,000).

1.42 Consistent with the low and middle income tax offset, the amount of the new low income tax offset is capped. It is not available to reduce the tax payable on the unearned income of minors that is taxed under the integrity rules in Division 6AA of Part III of the ITAA 1936. [Schedule 1, item 1, subsections 61-115(2) and (4) of the ITAA 1997]

1.43 Also consistent with the low and middle income tax offset, in determining the amount of this cap the beneficiary tax offset is treated as having been applied in the way most favourable to the taxpayer. [Schedule 1, item 1, subsection 61-115(3) of the ITAA 1997]

1.44 For more details, see the discussion at paragraphs 1.25 to 1.28 above in relation to the equivalent provisions for the low and middle income tax offset. The outcome of these restrictions is consistent with the rules that currently apply for the LITO.

Priority and withholding

1.45 Consistent with the LITO, the new low income tax offset is non-refundable and cannot be carried forward or transferred.

1.46 No specific priority is specified for the application of the new low income tax offset, so its priority is the same as the priority of other tax offsets not given a specific priority- see item 20 of the table in subsection 63-10(1) of the ITAA 1997. This results in the same substantive outcome for taxpayers that receive the new low income tax offset as arising for taxpayers that received the LITO.

1.47 While this does not affect the outcome, it does simplify the law in comparison with the priority rules for the LITO.

1.48 The LITO is subject to a special priority - it must be applied immediately prior to tax offsets covered by item 20 of the table in subsection 63-10(1) of the ITAA 1997.

1.49 This rule has no substantive effect. As the LITO and the offsets covered by item 20 are all non-refundable, non-transferable and cannot be carried forward, the order of their application does not matter - to the extent the amount of these offsets exceed the amount of tax payable, the unused amount, whatever its origin is lost. As a result, the special priority rule for the LITO results in complexity without affecting outcomes for taxpayers.

1.50 It is expected that the Commissioner of Taxation will treat the new low income tax offset in the same way as LITO when determining Pay-As-You-Go withholding schedules under section 15-25 in Schedule 1 to the Taxation Administration Act 1953.

Repeal of LITO

1.51 As outlined previously the new low income tax offset is intended to replace the LITO and the low and middle income tax offset.

1.52 To achieve this, Schedule 1 makes amendments to the LITO so that it is not available after the introduction of the new low income tax offset in the 2022-23 income year. [Schedule 2, item 5, subsection 159N(2A)]

Income tax thresholds

1.53 Schedule 2 to this Bill amends the Income Tax Rates Act 1986 to make changes to the rates of tax that apply to the taxable income of individuals and other entities not subject to special rules. [Schedule 2, items 2, 5 and 9, tables in clause 1 of Part 1, clause 1 of Part II and clause 1 of Part III of Schedule 7 to the Income Tax Rates Act 1986]

1.54 From the 2018-19 income year, these amendments increase the threshold above which the additional taxable income of an entity is taxed at a rate of 37 per cent to $90,000 (from $87,000) for both Australian resident and foreign resident taxpayers (for both ordinary taxable income and working holiday-maker taxable income).

1.55 From the 2022-23 income year, further changes are made to the thresholds above which the second and third rates of income tax apply. Specifically, an entity's taxable income is subject to the 19 per cent rate until it exceeds $41,000 rather than $37,000, and is then subject to the 32.5 per cent rate until it exceeds $120,000 rather than $90,000.

1.56 Finally, in the 2024-25 income year, the 37 per cent tax rate is abolished and the threshold above which taxable income is taxed at a rate of 45 per cent is increased to $200,000.

1.57 Following all of these changes the general rates of income tax for Australian resident individuals (and other entities not subject to specific rates) will be:

Table 1.3 - Australian resident income tax rates from 2024-25

1.58 Equivalent changes are also made to the income tax rate thresholds for foreign residents and working holiday-maker taxable income.

1.59 The final rates of income tax for foreign residents will be:

Table 1.4 - Foreign resident income tax rates from 2024-25

1.60 Similarly, the final rates of tax on working holiday-maker taxable income will be:

Table 1.5 - Working holiday-maker taxable income tax rates from 2024-25

1.61 Following this final change, the taxable income of Australian resident individuals and working holiday-maker taxable income is taxed at three distinct rates: the low rate of 19 per cent (15 per cent for working holiday-maker taxable income), the middle rate of 32.5 per cent, and the high rate of 45 per cent. The income of foreign resident individuals is taxed at only two rates: the middle rate of 32.5 per cent and the high rate of 45 per cent (this is consistent with current arrangements under which foreign resident individuals do not receive the benefit of the low, or first marginal, tax rate). [Schedule 2, items 2, 5 and 9, the tables in clause 1 of Part 1, clause 1 of Part II and clause 1 of Part III of Schedule 7 to the Income Tax Rates Act 1986]

Consequential amendments

1.62 Minor amendments have been made to the tax law to reflect these amendments, including updating relevant guidance material. [Schedule 2, items 7, 15 and 16, the example in clause 4 of Part II of Schedule 7, subparagraph 2(b)(ii) of Division 2 of Part I of Schedule 8 and paragraph 2(b) of Part I of Schedule 10 to the Income Tax Rates Act 1986 and Schedule 1, items 5, 6, 7, 8 and 9, the note to subsection 159N of the ITAA 1936, the item headed 'low income earner' in section 13-1 and note 7 to subsection 63-10(1) of the ITAA 1997 and paragraph (aa) of step 1 of the method statement in section 45-340 and paragraph (aa) of step 1 in the method statement in section 45-340 in Schedule 1 to the Taxation Administration Act 1953]

1.63 Schedule 2 also includes a number of minor amendments to provisions of the Income Tax Rates Act 1986 that refer to particular income tax rate thresholds. To accommodate the introduction of multiple income tax rates tables by the principal amendments, these amendments change these references to refer to the thresholds as set out in the table applying in the relevant income year. [Schedule 2, items 1, 3, 4, 6, 8 and 10 to 12, paragraphs 1(b) and 4(a) of Part I, paragraphs 1(b) and 4(a) of Part II and clause 1 of Part III of Schedule 7 to the Income Tax Rates Act 1986 and the definition of 'second resident personal tax rate' in subsection 3(1), subsections 20(1) and (2) and paragraphs 28(b), 28A(b) and 29(2)(a) of the Income Tax Rates Act 1986]

1.64 An amendment has also been made to the Income Tax Rates Act 1986 to repeal Part IV of that Act, as well as a reference to this Part in guidance material. This part dealt with the temporary budget repair levy and became inoperative following the cessation of that levy. [Schedule 1, items 13 and 17, Part IV of the Income Tax Rates Act 1986 and the note to subsection 4-11(2) of the Income Tax (Transitional Provisions) Act 1997]

1.65 Schedule 1 to the Bill also makes minor consequential amendments to the Income Tax Regulations (1936 Act) 2015 to address references to the LITO and section 159N. These amendments ensure that entitlements to the seniors and pensioners tax offset (the tax offset provided under section 160AAAA of the ITAA 1936) are not affected by these amendments. [Schedule 1, items 2 to 4, the definitions of '159N rebate maximum amount', '159N rebate reduction rate' and '159N rebate reduction threshold' in section 4of the Income Tax Assessment (1936 Act) Regulation 2015]]

1.66 The fact that these amendments to a legislative instrument are made by primary legislation does not prevent subsequent amendments to that instrument, including the provisions amended by this Bill, in the manner set out in the enabling legislation - see subsection 13(5) of the Legislation Act 2003.

Commencement, application and transitional provisions

General application and commencement provisions

1.67 The amendments to tax rates made by Schedule 2 to the Bill and the tax offset created in Schedule 1 to the Bill apply to income years as specified in the tables of rates or eligibility requirements for the offset as set out above.

1.68 The repeal of Part IV of the Income Tax Rates Act 1986 applies in relation to the 2017-18 income year and later income years. It does not affect the operation of the temporary budget repair levy in prior years when it was operative. [Schedule 2, item 14]

1.69 The other amendments made by Schedules 1 and 2 to the Bill apply from commencement.

1.70 With the exception of the automatic repeal provisions discussed in paragraphs 1.70 to 1.73 below, the provisions of Schedules 1 and 2 commence at the start of the first quarter to commence following the day of Royal Assent. [items 2 and 4 of the table in clause 2 of the Bill]

Repeal of spent provisions

1.71 A number of the amendments to income tax rate thresholds made by the Bill only apply to specified periods. Specifically, the tables of income tax rates for the income years from 2018-19 to 2021-22 and for 2022-23 to 2023-24 have no application outside of these income years. Similarly, the low and middle income tax offset and the LITO are replaced by the new low income tax offset after the 2021-22 income year.

1.72 Schedules 1 and 2 include amendments to repeal these provisions two years after they have ceased to apply and remove related references that have also become redundant. This ensures that the tax law is not unnecessarily expanded and made more complex for the reader by keeping redundant provisions. [Schedule 2, items 18 to 24, the tables dealing with the 2018-19 to 2021-22 income years and the 2022-23 to 2023-24 income years in clause 1 of Parts I, II and III of Schedule 7 to the Income Tax Rates Act 1986 and Schedule 1, items 10 to 17 and 19, section 159N of the ITAA 1936 and the item headed low income earner in the table in section 13-1, the heading to Subdivision 61-D, sections 61-105 and 61-107,subsections 61-110(1) and (2), item 17 of the table in subsection 63-10(1), notes 6 and7 to subsection 63-10(1) of the ITAA 1997, paragraph (f) of step 1 of the method statement in section 45-340 and paragraph (e) of step 1 of the method statement in section 45-375 in Schedule 1 to the Taxation Administration Act 1953]

1.73 These amendments commence two years after the relevant provisions become redundant. [items 3, 5 and 6 of the table in clause 2 of the Bill]

1.74 These repeals are subject to transitional rules to make clear that the repeal does not affect the operation of those provisions in relation to the income years to which they apply. [Schedule 2, item 25 and Schedule 1, items 18 and 20]