House of Representatives

Explanatory Memorandum

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

Chapter 1 - Accelerating the Personal Income Tax Plan

Outline of chapter

1.1 Schedule 1 to the Bill brings forward stage two of the Government's Personal Income Tax Plan to the 2020-21 income year from the 2022-23 income year. Schedule 1 to the Bill also retains the low and middle income tax offset for the 2020-21 income year rather than having it cease to be available at the commencement of the second stage.

1.2 The changes involved in stage two of the Government's Personal Income Tax Plan that are brought forward by Schedule 1 to the Bill are:

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increasing the income tax thresholds for individuals (and certain other entities) for the 2020-21 income year and later income years; and

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replacing the existing low income tax offset with a new increased low income tax offset for the 2020-21 income year and later income years.

1.3 These changes were previously legislated to apply from the 2022-23 income year onwards under the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 and the Treasury Laws Amendment (Tax Relief So Working Australians Keep More of Their Money) Act 2019.

1.4 The low and middle income tax offset was previously legislated to be removed at the commencement of stage two of the Personal Income Tax Plan (at the same time as the increase to the income tax thresholds and low income tax offset). However, Schedule 1 to the Bill retains the low and middle income tax offset for an additional year (being the 2020-21 income year). After this time, from the 2021-22 income year onwards, the low and middle income tax offset will cease to be available.

Context of amendments

Income tax rates for individuals and other entities

1.5 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 on additional income as their income increases beyond particular thresholds.

1.6 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.

1.7 Under Schedule 7, in the 2020-21 income year, Australian resident taxpayers are currently 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.

1.8 Foreign resident taxpayers in the 2020-21 income year 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.

1.9 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 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

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

1.11 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 - that is available in income years before the 2022-23 income year.

1.12 Taxpayers are entitled to this offset for an income year if during that income year their taxable income (or 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.

1.13 Subdivision 61-D of the ITAA 1997 currently 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.

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

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for taxpayers with taxable income not exceeding $37,000 - $255;

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for taxpayers with taxable income exceeding $37,000 but not exceeding $48,000 - $255 plus 7.5 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 - $1,080; and

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for taxpayers with taxable income exceeding $90,000 but not exceeding $126,000 - $1,080 less 3 per cent of the amount of income that exceeds $90,000.

1.15 Entitlement to the low and middle income tax offset is in addition to the low income tax offset.

Personal Income Tax Plan

1.16 The Government announced a series of changes to the personal tax system, referred to as the Personal Income Tax Plan, in the 2018-19 Budget. The Government subsequently announced further changes to this plan in the 2019-20 Budget.

1.17 The Personal Income Tax Plan involves changes to the general rates of income tax, tax thresholds and tax offsets in three stages. The first stage commenced in 2018-19, the second stage is scheduled to commence in 2022-23 and the third and final stage is scheduled to commence in 2024-25.

1.18 The second stage of the Personal Income Tax Plan broadly involves:

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increasing certain income tax thresholds so that the lower tax rates of 19 per cent and 32.5 per cent apply to a greater proportion of the taxable income of a resident individual (or similarly taxed entity), as well as the equivalent thresholds for foreign residents and working holiday-makers;

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removing the current low and middle income tax offset; and

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replacing the current low income tax offset with a new low income tax offset (that provides for an increased amount of up to $700 of income tax to be offset).

1.19 The existing legislative amendments that give effect to the Personal Income Tax Plan are set out in the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 and the Treasury Laws Amendment (Tax Relief So Working Australians Keep More of Their Money) Act 2019.

Summary of new law

1.20 Schedule 1 to the Bill amends the income tax law to:

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bring forward the changes to the income tax thresholds (currently legislated to apply to the 2022-23 income year and later income years) to the 2020-21 income year and later income years;

•

bring forward the legislated changes to remove the existing low income tax offset and replace it with a new increased low income tax offset so that these changes apply for the 2020-21 income year and later income years; and

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retain the low and middle income tax offset for the 2020-21 income year, with the offset now ceasing to be available in the 2021-22 income year and later income years.

1.21 Together, these changes reduce the income tax burden for tax paying individuals and boost consumption to support the economic recovery from the impacts of the Coronavirus on the Australian economy.

Comparison of key features of new law and current law

Detailed explanation of new law

1.22 Schedule 1 to the Bill amends the income tax law to bring forward the changes to the income tax thresholds (currently legislated to apply to the 2022-23 income year and later income years) to the 2020-21 income year and later income years.

1.23 Schedule 1 to the Bill also amends the income tax law to:

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bring forward the planned changes to remove the existing low income tax offset and replace it with a new low income tax offset to the 2020-21 income year and later income years;

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retain the low and middle income tax offset for the 2020-21 income year; and

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cease to make the low and middle income tax offset available for the 2021-22 income year and later income years.

1.24 In effect, the changes bring forward stage two of the Government's Personal Income Tax Plan, while retaining the low and middle income tax offset for a further year. This provides additional relief for taxpayers in light of the impact of the Coronavirus on the Australian economy and boosts consumption.

Bringing forward the increases to certain income tax thresholds

1.25 Schedule 1 to the Bill amends the Income Tax Rates Act 1986 to bring forward the changes to increase certain income tax thresholds that were previously legislated to apply for the 2022-23 and 2023-24 income years.

1.26 Under the existing law, the income tax rates and thresholds for Australian resident taxpayers, foreign resident taxpayers and working holiday-makers are changing in three stages to give effect to the Personal Income Tax Plan (see Schedule 7 of the Income Tax Rates Act 1986).

1.27 The changes to give effect to stage one of the Personal Income Tax Plan commenced for the 2018-19 income year and were to apply until the end of the 2021-22 income year.

1.28 In stage two of the plan, which was to apply in the 2022-23 and 2023-24 income years, further changes were to be made to the thresholds below which certain rates of personal income tax apply. Specifically, an Australian resident entity's taxable income would be subject to the 19 per cent marginal tax rate until it exceeds $45,000 rather than $37,000, and would then be subject to the 32.5 per cent marginal tax rate until it exceeds $120,000 rather than $90,000, and the same changes would apply to equivalent thresholds for foreign residents and working holiday-makers.

1.29 In stage three of the plan, applying in 2024-25 and subsequent income years, there are further changes to personal income tax rates and thresholds as set out in the Explanatory Memorandum to the Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 and Explanatory Memorandum to the Treasury Laws Amendment (Tax Relief So Working Australians Keep More of Their Money) Bill 2019.

1.30 Under the new law, the tax rates and thresholds that were to apply to the 2022-23 and 2023-24 income year apply to the 2020-21, 2021-22, 2022-23 and 2023-24 income years. [Schedule 1, items 3, 7 and 11, headings to tables dealing with tax rates for resident taxpayers, non-resident taxpayers and working holiday makers in Parts I, II and III of Schedule 7 to the Income Tax Rates Act 1986]

1.31 This change, combined with the related changes to tax offsets discussed below, has the effect of bringing forward stage two of the Personal Income Tax Plan by two years to provide earlier tax relief to taxpayers, especially low and middle income earners.

1.32 The date for the implementation of stage three of the Personal Income Tax Plan is unchanged.

Bringing forward the increased low income tax offset and retaining the low and middle income tax offset

1.33 Schedule 1 to the Bill amends section 61-110 of the ITAA 1997 to make the new low income tax offset available for the 2020-21 income year and later income years. [Schedule 1, item 19, subsections 61-110(1) and (2) of the ITAA 1997]

1.34 The base amount of the new low income tax offset is $700. However, this amount is reduced by 5 per cent of the amount by which the taxpayer's taxable income exceeds $37,500 but does not exceed $45,000 and by 1.5 per cent of the amount by which the taxpayer's taxable income exceeds $45,000. This is higher than the existing low income tax offset (set out in section 159N of the ITAA 1936), which provides for a tax offset of an amount of up to $445, and is intended to replace this offset.

1.35 Consistent with this intention, the existing low income tax offset ceases to be available for the 2020-21 income year and later income years. [Schedule 1, item 17, section 159N of the ITAA 1936]

1.36 Prior to the amendments made by Schedule 1 to the Bill, the replacement of the existing low income tax offset with the new low income tax offset was to occur in two years' time - for the 2022-23 income year - as part of the implementation of stage two of the Personal Income Tax Plan.

1.37 Schedule 1 to the Bill also amends the period for which the low and middle income tax offset is available.

1.38 The low and middle income tax offset is a temporary tax offset that was introduced as part of the Personal Income Tax Plan to provide immediate assistance to low and middle income earners. Before the amendments made in Schedule 1 to the Bill, it was to cease to apply with respect to the 2022-23 income year and later income years (at the same time as the changes to the low income tax offset and income tax thresholds were to take place under stage two of the plan).

1.39 However, the amendments made by Schedule 1 to the Bill mean that the low and middle income tax offset will not cease to apply when the stage two changes commence. Instead, the low and middle income tax offset is available for the 2020-21 income year and only ceases to be available from the 2021-22 income year onwards. [Schedule 1, items 25, 26 and 27, sections 61-105, 61-107 and heading to Subdivision 61-D of the ITAA 1997]

1.40 Bringing forward these changes to the low income tax offset and retaining the low and middle income tax offset for an additional year provides tax relief to eligible taxpayers. It supports the economic recovery from the impacts of the Coronavirus on the Australian economy by boosting consumption.

Consequential amendments

1.41 Minor amendments have been made to the income tax law to reflect the above changes, including updating the relevant guide material and removing references that have become redundant due to the changes. [Schedule 1, items 4, 8, 12, 18, 20, 21, 22 and 23 notes to the tables dealing with tax rates for resident taxpayers, non-resident taxpayers and working holiday makers in Parts I, II and III of Schedule 7 to the Income Tax Rates Act 1986, table item headed "low income earner" in section 13-1 of the ITAA 1997, item 17 of the table in subsection 63-10(1) of the ITAA 1997, notes 6 and 7 to paragraph 63-10(1)(f), of step 1 of the method statement in section 45-340 and paragraph (e) of step 1 in the method statement in section 45-375 in Schedule 1 to the Taxation Administration Act 1953]

Application and transitional provisions

General application and commencement provisions

1.42 The repeal and amendments made to the low income tax offset apply in relation to assessments for the 2020-21 income year or a later income year. [Schedule 1, item 8]

1.43 With the exception of the automatic repeal provisions discussed in paragraphs 1.48 and 1.49 below, the provisions of Schedule 1 to the Bill commence on the day after Royal Assent. [items 2, 4, and 6 of the table in section 2 of the Bill]

1.44 While the provisions relating to the low income tax offset and the changes to the tax rates and thresholds apply retrospectively, they do so in a way that is wholly beneficial for affected entities.

1.45 Given the new law overrides amendments to the existing law that were yet to have effect, those amendments that have not yet commenced have been repealed so as not to conflict with the new law. [Schedule 1, items 28, 29, 30 and 31, table items 3, 5 and 6 in subsection 2(1), Part 3 of Schedule 1 and Part 3 of Schedule 2 to the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018]

Repeal of other spent provisions

1.46 Schedule 1 to the Bill includes amendments to repeal certain provisions in the income tax law when the provisions cease to apply. This ensures that the income tax law is not unnecessarily expanded and made more complex for the reader by retaining redundant provisions.

1.47 In particular, the tables setting out the tax rates on the taxable income for Australian resident taxpayers, foreign taxpayers and working holiday-makers for the 2018-19 and 2019-20 income years (set out in Schedule 7 of the Income Tax Rates Act 1986) will have no application to income years after the 2019-20 income year. As a result, they will be repealed on commencement of Schedule 1 to the Bill. [item 2 of the table in section 2 of the Bill and Schedule 1, items 1, 5 and 9, headings to tables dealing with tax rates for resident taxpayers, non-resident taxpayers and working holiday makers in Parts I, II and III of Schedule 7 to the Income Tax Rates Act 1986]

1.48 Similarly, the tables setting out the tax rates for the 2020-21, 2021-22, 2022-23, 2023-24 income years (also set out in Schedule 7 of the Income Tax Rates Act 1986) will also be repealed on 1 July 2024, following the end of the last income year to which they apply. [item 3 of the table in section 2 of the Bill and Schedule 1, items 13, 14 and 15, tables dealing with tax rates for resident taxpayers, non-resident taxpayers and working holiday makers in Parts I, II and III of Schedule 7 to the Income Tax Rates Act 1986]

1.49 The repeal of the provisions regarding the low and middle income tax offset applies in relation to assessments for the 2021-22 income year or later income years. [item 5 of the table in clause 3 of the Bill and Schedule 1, item 24]

1.50 The repeals to the tables setting out the tax rates 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 1, items 2, 6, 10 and 16]