House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 1 - Personal income tax relief

Outline of chapter

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

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increase the base and maximum amounts of the low and middle income tax offset to $255 and $1,080, respectively, for the 2018-19, 2019-20, 2020-21 and 2021-22 income years; and

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increase the amount of the low income tax offset from 2022-23.

1.2 Schedule 2 to this Bill amends the income tax law to reduce the tax payable by individuals in 2022-23 and later income years by increasing income tax rate thresholds and in 2024-25 and later income years by lowering income tax rates.

Context of amendments

Income tax rates for individuals and other entities

1.3 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.

1.4 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 that Act. Under Schedule 7, in 2018-19 Australian resident taxpayers are generally:

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

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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;

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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 $90,000;

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subject to tax at a rate of 37 per cent on the part of their taxable income that exceeds $90,000 but does not exceed $180,000; and

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

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

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32.5 per cent on the part of their taxable income that does not exceed $90,000;

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37 per cent on the part of their taxable income that exceeds $90,000 but does not exceed $180,000; and

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

1.6 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

1.7 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.

1.8 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 the low income tax offset or LITO - that is available in income years before the 2022-23 income year.

1.9 Taxpayers are entitled to this offset for an income year if during that income year their taxable income (the share of the income of the trust going to the relevant beneficiary in the case of a trustee) 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 their taxable income exceeds $37,000.

1.10 Subdivision 61-D of the ITAA 1997 provides for a tax offset - the low and middle income tax offset - for lower income individuals (and certain trustees taxed in the place of these individuals) in the 2018-19, 2019-20, 2020-21 and 2021-22 income years.

1.11 The amount of the low and middle income tax offset is:

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for taxpayers with taxable income not exceeding $37,000-$200;

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for taxpayers with taxable income exceeding $37,000 but not exceeding $48,000-$200 plus 3 per cent of the amount of income that exceeds $37,000;

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for taxpayers with taxable income exceeding $48,000 but not exceeding $90,000-$530; and

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for taxpayers with taxable income exceeding $90,000-$530 less 1.5 per cent of the amount of income that exceeds $90,000.

1.12 Entitlement to the low and middle income tax offset is in addition to the LITO. Both the low and middle income tax offset and the LITO cease to be available in 2022-23. Both are to be replaced by a new low income tax offset under Subdivision 61-D. The new low income tax offset is largely the same as the existing LITO, with the amount of the offset set at:

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for taxpayers with taxable income not exceeding $37,000-$645;

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for taxpayers with taxable income exceeding $37,000 but not exceeding $41,000-$645 less 6.5 per cent of the amount of the income that exceeds $37,000; and

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for taxpayers with taxable income exceeding $41,000 but not exceeding $66,667-$385 less 1.5 per cent of the amount of the income that exceeds $41,000.

1.13 The replacement of the existing LITO and the low and middle income tax offset with the new LITO coincides with a range of changes to the income tax rates and thresholds as outlined in the Government's Personal Income Tax Plan that was announced in the 2018-19 Budget.

Summary of new law

1.14 Schedule 1 to this Bill amends the ITAA 1997 to:

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increase the base and maximum amounts of the low and middle income tax offset for the 2018-19, 2019-20, 2020-2021 and 2021-22 income years to $255 (from $200) and $1,080 (from $530), respectively, and make related changes to taper rates and thresholds; and

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change the base amount, taxable income thresholds and taper rates for the new low income tax offset for 2022-23 and later income years ensuring all taxpayers remain better off following the cessation of the low and middle income tax offset in 2022-23.

1.15 Schedule 2 to this Bill amends the Income Tax Rates Act 1986 to:

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for the 2022-23 income year and later income years, increase the amount of taxable income subject to the first personal rate of income tax of 19 per cent to include an individual's taxable income between $18,201 and $45,000 (rather than $41,000); and

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for the 2024-25 income year and later income years, reduce the second personal rate of income tax to 30 per cent (from 32.5 per cent).

1.16 Schedule 2 also makes equivalent changes for other entities that are taxed like individuals as well as to the rates and thresholds that apply to foreign residents and working holiday-makers.

Comparison of key features of new law and current law

Detailed explanation of new law

1.17 This Bill amends the income tax law to:

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increase the base and maximum amount of the low and middle income tax offset for the 2018-19, 2019-20, 2020-21 and 2021-22 income years;

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make changes to the resident income tax thresholds (and the corresponding thresholds for working holiday makers) and the new low income tax offset from the 2022-23 income year to ensure that no taxpayers are worse off following the cessation of the low and middle income tax offset; and

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reduce the second resident personal tax rate (and the corresponding rates for foreign residents and working holiday makers) to 30 per cent (from 32.5 per cent) from the 2024-25 income year.

Increasing the low and middle income tax offset

Low and middle income tax offset

1.18 Schedule 1 to the Bill amends the ITAA 1997 to:

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increase the base amount of the low and middle income tax offset to $255 from $200; and

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increase the maximum amount of the low and middle income tax offset to $1,080 from $530.

[Schedule 1, item 2, the table in subsection 61-107(1) of the ITAA 1997]

1.19 However, the low and middle income tax offset is still intended to provide the maximum benefit to eligible taxpayers with taxable income in the same range.

1.20 To ensure this is the case, Schedule 1 amends the rate at which the offset increases from the new base rate of $255 to be 7.5 per cent (rather than 3 per cent) of the amount by which the taxpayer's income exceeds $37,000. It also amends the rate at which the offset is reduced when a taxpayer's income exceeds $90,000 to be 3 per cent (rather than 1.5 per cent) of the amount by which the taxpayer's income exceeds $90,000. [Schedule 1, item 2, items 2 and 4 of the table in subsection 61-107(1) of the ITAA 1997]

1.21 Schedule 1 also amends the maximum amount of taxable income a taxpayer can receive for an income year while still being entitled to the low and middle income tax offset to be $126,000 (rather than $125,333). This change makes the eligibility threshold consistent with the new taper rates. [Schedule 1, item 1, paragraphs 61-105(1)(b) and (2)(c) of the ITAA 1997]

Related changes

1.22 The low and middle income tax offset is a temporary tax offset that was introduced to provide immediate assistance to low and middle income earners. It ceases to apply with respect to the 2022-23 income year and later income years. After this time, the changes made to income tax thresholds and the new low income tax offset introduced as part of the Government's Personal Income Tax Plan that was announced in the 2018-19 Budget ensure that all recipients of the offset receive at least an equivalent reduction in their tax liability.

1.23 With the increase in the maximum amount of the low and middle income tax offset, it is possible that, absent further change, taxpayers receiving the offset might not receive a reduction in their tax liability that is at least equivalent to the benefit provided by the offset.

1.24 Therefore, Schedules 1 and 2 amend the ITAA 1997 and the Income Tax Rates Act 1986 for 2022-23 and later income years to:

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increase to $45,000 (from $41,000) the amount of income an Australian resident individual or working holiday maker can earn that is subject to the relevant first personal rate of tax (19 per cent for Australian residents and 15 per cent for working holiday makers) [Schedule 2, items 1, 2, 3 and 4, item 1 of the tables in Clause 1 of Part I and item 1 of the tables in Clause 1 of Part III of Schedule 7 to the Income Tax Rates Act 1986]; and

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amend the amount of the new low income tax offset so that the amount of the offset for an eligible taxpayer with taxable income:

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not exceeding $37,500 is increased to $700 (from $645);

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exceeding $37,500 but not exceeding $45,000 (rather than $41,000) is $700 less 5 per cent (rather than 6.5 per cent ) of the amount by which a taxpayer's taxable income exceeds $37,500; and

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exceeding $45,000 (rather than $41,000) is $325 (rather than $385) less 1.5 per cent of the amount by which a taxpayer's taxable income exceeds $45,000.

[Schedule 1, item 3, the table in subsection 61-115(1) of the ITAA 1997]

1.25 The effect of those changes is to ensure that all taxpayers receiving the low and middle income tax offset before 2022-23 receive a reduction in their income tax payable that is at least equivalent to the benefit they received from that tax offset.

Reducing the second resident personal tax rate and equivalent tax rates

1.26 Schedule 2 amends the Income Tax Rates Act 1986 to reduce the second Australian resident personal tax rate (defined in that Act as the second resident personal tax rate) from 32.5 per cent to 30 per cent for 2024-25 and later income years. It also makes equivalent changes to the rates for working holiday maker taxable income. [Schedule 2, items 1, 2, 3 and 4, the tables in Clause 1 of Part I and the tables in Clause 1 of Part III of Schedule 7 to the Income Tax Rates Act 1986]

1.27 While no direct amendment is made to the rates of income tax payable by foreign resident individuals and certain other taxpayers, the relevant rate of tax is already directly linked to the second Australian resident personal tax rate and so the reduction in rate also applies for these taxpayers.

Application and transitional provisions

1.28 The Bill commences on the day after Royal Assent. [Clause 2]

1.29 The amendments made by Schedule 1 to the Bill to the low and middle income tax offset apply in the 2018-19 income year and later income years until the cessation of the tax offset in the 2022-23 income year. [Schedule 1, item 4]

1.30 This ensures that all eligible taxpayers receive an immediate benefit from the increase to the offset. While the change in the offset is retrospective, it is wholly beneficial to taxpayers. Increasing the maximum amount of the offset simply increases the amount by which taxpayers' income tax liability is reduced.

1.31 The amendments made by Schedule 1 to the Bill to the amount of the new low income tax offset apply in the 2022-23 income year and later income years, consistent with the existing application of that table (see section 61-110 of the ITAA 1997).

1.32 The amendments made by Schedule 2 to the Bill to income tax rates and thresholds apply to either the 2022-23 and 2023-24 income years or the 2024-25 income year and later income years as set out above.