House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

General outline and financial impact

Reducing personal income tax

Schedule 1 to this bill amends the Income Tax Rates Act 1986 to provide for increases in personal income tax thresholds for the 42% and 47% tax brackets.

Date of effect: The increases in thresholds will take effect in two stages: stage one from 1 July 2004 and stage two from 1 July 2005.

Proposal announced: 2004-2005 Budget.

Financial impact: $1.925 billion in 2004-2005, $3.8 billion in 2005 2006, $4.25 billion in 2006-2007 and $4.75 billion in 2007-2008.

Compliance cost impact: Nil.

Chapter 1 - Reducing personal income tax

Outline of chapter

1.1 Schedule 1 to this bill will amend the Income Tax Rates Act 1986 to provide for increases in personal income tax thresholds for the 42% and 47% tax brackets.

Context of amendments

1.2 The amendments will give effect to the personal income tax cuts announced by the Australian Government in the 2004-2005 Budget on 11 May 2004.

1.3 These tax cuts will mean that more than 80% of taxpayers will be in or below the 30% tax bracket over the forward estimates period. The overwhelming majority of taxpayers who earn between $21,600 and $63,000 will not face any increase in their tax rate as their income increases. This will improve rewards for those wanting to work overtime or upgrade their skills.

Summary of new law

1.4 The amendments will increase the income thresholds at which the top two marginal income tax rates apply for resident and non-resident taxpayers other than companies, prescribed unit trusts, superannuation funds and certain other trusts.

1.5 The increases in income thresholds phase in over two income years, with the first increase in thresholds taking effect for the 2004-2005 income year and the second increase in thresholds taking effect for the 2005-2006 income year and later income years.

Comparison of key features of new law and current law

1.6 The personal income tax thresholds will be increased for the top two tax brackets.

1.7 The income threshold for the 42% tax bracket will be increased from $52,001 to $58,001 from 1 July 2004 and then to $63,001 from 1 July 2005. The income threshold for the 47% tax bracket will be increased from $62,501 to $70,001 from 1 July 2004 and then to $80,001 from 1 July 2005.

Detailed explanation of new law

Resident taxpayers

1.8 Item 1 of Schedule 1 replaces the table in Clause 1 of Part I of Schedule 7 to the Income Tax Rates Act 1986, which sets out the rates of tax on the taxable income of a resident taxpayer.

1.9 Table 1.1 sets out the current tax thresholds for resident taxpayers and the proposed tax thresholds that will apply to assessments for the 2004-2005 income year, and for the 2005-2006 income year and later years.

Non-resident taxpayers

1.10 The new income thresholds will also apply to non-resident taxpayers.

1.11 Item 2 of Schedule 1 replaces the table in Clause 1 of Part II of Schedule 7 of the Income Tax Rates Act 1986, which sets out the rates of tax on the taxable income of a non-resident taxpayer.

1.12 Table 1.2 sets out the current tax thresholds for non-resident taxpayers and the proposed tax thresholds that will apply to assessments for the 2004-2005 income year, and for the 2005-2006 income year and later years.

Application and transitional provisions

1.13 Clause 3 of Schedule 1 to this bill provides for the changes to personal income tax thresholds in Schedule 1 to apply for the 2004-2005 year of income and later years.