House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Wayne Swan MP)

Glossary

The following abbreviation is used throughout this explanatory memorandum.

General outline and financial impact

Reducing personal income tax

This Bill amends the Income Tax Rates Act 1986 to increase the threshold at which the 30 per cent marginal tax rate begins to apply and to decrease the 40 per cent marginal tax rate to 38 per cent (from 1 July 2009) and to 37 per cent (from 1 July 2010).

This Bill also amends the Income Tax Assessment Act 1936 (ITAA 1936) to increase the maximum amount of low income tax offset.

In addition, this Bill amends the Medicare Levy Act 1986 to increase the income threshold at which the Medicare levy becomes payable for taxpayers who are eligible for the senior Australians tax offset.

Date of effect: Increases in the 30 per cent threshold will apply to assessments for the 2008-09, 2009-10, 2010-11 and later income years. Reduction of the 40 per cent marginal tax rate will apply to assessments for the 2009-10 income year and the 2010-11 and later income years.

Amendments to the low income tax offset and consequential amendments to the Medicare levy for senior Australians will apply to assessments for the 2008-09 income year, the 2009-10 income year and the 2010-11 and later income years.

Proposal announced: This measure was announced as an election commitment, in A Tax Plan For Australia's Future, on 19 October 2007.

Financial impact: This measure will have these revenue implications:

Compliance cost impact: Nil.

Chapter 1 - Reducing personal income tax

Outline of chapter

1.1 This Bill amends the Income Tax Rates Act 1986 to increase the threshold at which the 30 per cent marginal tax rate begins to apply and to decrease the 40 per cent marginal tax rate to 38 per cent (from 1 July 2009) and to 37 per cent (from 1 July 2010).

1.2 This Bill also amends the Income Tax Assessment Act 1936 (ITAA 1936) to increase the maximum amount of low income tax offset.

1.3 In addition, this Bill amends the Medicare Levy Act 1986 to increase the income threshold at which the Medicare levy becomes payable for taxpayers who are eligible for the senior Australians tax offset.

Context of amendments

1.4 These amendments give effect to the personal income tax cuts promised in the election commitment A Tax Plan For Australia's Future released on 19 October 2007.

1.5 The tax cuts are designed to maximise individual incentive and enhance workforce participation.

Summary of new law

1.6 Amendments to the Income Tax Rates Act 1986 raise the 30 per cent threshold for residents and non-residents:

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from $30,001 to $34,001 from 1 July 2008;

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to $35,001 from 1 July 2009; and

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to $37,001 from 1 July 2010.

1.7 Amendments to the Income Tax Rates Act 1986 also reduce the second highest marginal tax rate for residents and non-residents:

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from 40 per cent to 38 per cent from 1 July 2009; and

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to 37 per cent from 1 July 2010.

1.8 Amendments to the ITAA 1936 provide for an increase in the low income tax offset:

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from $750 to $1,200 for the 2008-09 income year;

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to $1,350 for the 2009-10 income year; and

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to $1,500 for the 2010-11 and later income years.

1.9 Amendments to the Medicare Levy Act 1986 raise the income threshold at which taxpayers who are eligible for the senior Australians tax offset become liable to pay the Medicare levy.

Comparison of key features of new law and current law

1.10 The key changes to the current law include increases to the threshold where the 30 per cent marginal tax rate begins to apply for the 2008-09, 2009-10 and 2010-11 income years; and reductions in the second highest marginal tax rate for the 2009-10 and 2010-11 income years.

1.11 From 1 July 2008:

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the lower limit of the 30 per cent threshold will rise from $30,001 to $34,001; and

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the low income tax offset will increase from $750 to $1,200. The low income tax offset will continue to phase out from $30,000 at a rate of 4 cents in the dollar for every dollar of income over $30,000.

1.12 From 1 July 2009:

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the lower limit of the 30 per cent threshold will rise from $34,001 to $35,001;

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the low income tax offset will increase from $1,200 to $1,350; and

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the 40 per cent tax rate will be reduced to 38 per cent.

1.13 From 1 July 2010:

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the lower limit of the 30 per cent threshold will rise from $35,001 to $37,001;

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the low income tax offset will increase from $1,350 to $1,500; and

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the 38 per cent tax rate will be reduced to 37 per cent.

1.14 As a consequence of the increases in the low income tax offset, the income level above which senior Australians (eligible for the senior Australians tax offset) begin to pay tax will increase. This will mean that eligible senior Australians will have no tax liability until their income reaches:

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$28,867 for singles and $24,680 for each member of a couple in the 2008-09 income year;

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$29,867 for singles and $25,680 for each member of a couple in the 2009-10 income year; and

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$30,685 for singles and $26,680 for each member of a couple in the 2010-11 income year.

1.15 The Medicare levy threshold amount for individuals eligible for the senior Australians tax offset will increase:

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from 1 July 2008 from $25,867 to $28,867;

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from 1 July 2009 from $28,867 to $29,867; and

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from 1 July 2010 from $29,867 to $30,685.

1.16 The Medicare levy phase-in limit for individuals eligible for the senior Australians tax offset will also increase:

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from 1 July 2008 from $30,431 to $33,961;

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from 1 July 2009 from $33,961 to $35,137; and

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from 1 July 2010 from $35,137 to $36,100.

1.17 The Medicare levy threshold amount for certain couples eligible for the senior Australians tax offset, where the threshold for single senior Australians is not sufficient to ensure that they incur no Medicare levy liability until they incur an income tax liability, will increase:

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from 1 July 2008 from $37,950 to $42,000;

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from 1 July 2009 from $42,000 to $43,500; and

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from 1 July 2010 from $43,500 to $44,500.

1.18 The Medicare levy phase-in limit, that applies to certain couples eligible for the senior Australians tax offset, will also increase:

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from 1 July 2008 from $44,647 to $49,412;

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from 1 July 2009 from $49,412 to $51,177; and

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from 1 July 2010 from $51,177 to $52,353.

1.19 The consequential amendments to Schedules 8 and 10 of the Income Tax Rates Act 1986 result from increases in the threshold where the 30 per cent marginal tax rate begins to apply.

Detailed explanation of new law

Australian resident taxpayers

1.20 Items 3, 13 and 23, with effect from 1 July 2008, 1 July 2009 and 1 July 2010 respectively, replace the table in clause 1 of Part I of Schedule 7 to the Income Tax Rates Act 1986, which sets out the rate of tax on the taxable income of a resident taxpayer. [Schedule 1, items 3, 13 and 23]

1.21 Table 1.1 sets out the rates and thresholds currently legislated for resident taxpayers and the new tax thresholds that will apply to assessments for the 2008-09 income year, the 2009-10 income year and the 2010-11 income year and later years.

Non-resident taxpayers

1.22 The new income tax thresholds also apply to non-resident taxpayers.

1.23 Items 4, 14 and 24, with effect from 1 July 2008, 1 July 2009 and 1 July 2010 respectively, replace the table in clause 1 of Part II of Schedule 7 to the Income Tax Rates Act 1986, which sets out the rate of tax on the taxable income of a non-resident taxpayer. [Schedule 1, items 4, 14 and 24]

1.24 Table 1.2 sets out the rates and thresholds currently legislated for non-resident taxpayers and the proposed tax thresholds that will apply to assessments for the 2008-09 income year, the 2009-10 income year and the 2010-11 income year and later years.

Increase in the low income tax offset

1.25 Increases in the maximum amount of low income tax offset are phased in.

1.26 For the 2008-09 income year, taxpayers are entitled to the low income tax offset if their taxable income is less than $60,000 [Schedule 1, item 1, subsection 159N(1) of the ITAA 1936] . The maximum amount of the tax offset will increase from $750 to $1,200 per year [Schedule 1, item 2, subsection 159N(2) of the ITAA 1936] .

1.27 For the 2009-10 income year, taxpayers will be entitled to the low income tax offset if their taxable income is less than $63,750 [Schedule 1, item 11, subsection 159N(1) of the ITAA 1936] . The maximum amount of the tax offset will increase to $1,350 per year [Schedule 1, item 12, subsection 159N(2) of the ITAA 1936] .

1.28 From 1 July 2010, taxpayers will be entitled to the low income tax offset if their taxable income is less than $67,500 [Schedule 1, item 21, subsection 159N(1) of the ITAA 1936] . The maximum amount of the tax offset will increase to $1,500 per year [Schedule 1, item 22, subsection 159N(2) of the ITAA 1936] .

1.29 The low income tax offset will still phase out at a rate of four cents for each dollar over $30,000.

Increase in the Medicare levy thresholds for senior Australians

1.30 As a result of the phased-in increases in the low income tax offset from $750 to $1,500 by the 2010-11 income year, the income level above which Australians eligible for the senior Australians tax offset begin to pay tax will increase.

1.31 This means that eligible single, senior Australians will have no tax liability until their income reaches $28,867 for the 2008-09 income year, $29,867 for the 2009-10 income year and $30,685 for the 2010-11 income year.

1.32 Eligible senior Australians who are members of a couple will have no tax liability until their income reaches $24,680 in the 2008-09 income year, $25,680 in the 2009-10 income year and $26,680 in the 2010-11 income year.

1.33 To ensure that senior Australians do not pay the Medicare levy until they are liable to pay income tax, the Medicare levy threshold for single seniors increases accordingly from $25,867 to $28,867 for the 2008-09 income year, to $29,867 for the 2009-10 income year and to $30,685 for the 2010-11 income year. [Schedule 1, items 8, 18 and 28, subsection 3(1) of the Medicare Levy Act 1986]

1.34 The phase-in limit, below which a single taxpayer eligible for the senior Australians tax offset pays less than the full Medicare levy rate, is raised to $33,961 from 1 July 2008, to $35,137 from 1 July 2009 and to $36,100 from 1 July 2010. [Schedule 1, items 7, 17 and 27, subsection 3(1) of the Medicare Levy Act 1986]

1.35 Senior couples for whom the threshold for single senior Australians is not sufficient to ensure that they incur no Medicare levy liability until they incur an income tax liability (eg, because one partner earns significantly more than the other) are able to access a senior family threshold. From 1 July 2008, the new senior family threshold is raised to $42,000 to ensure that seniors in a couple do not incur a Medicare levy liability until they incur an income tax liability. From 1 July 2009, the senior family threshold will be $43,500 and from 1 July 2010, the senior family threshold will be $44,500. [Schedule 1, items 9, 19 and 29, subsection 8(7) of the Medicare Levy Act 1986]

Application and transitional provisions

1.36 Item 10 provides for the changes to the personal income tax thresholds, the low income tax offset, and the Medicare levy threshold amount and phase-in limit for senior Australians, to apply to assessments for the 2008-09 income year.

1.37 Item 20 provides for the changes to the personal income tax rates and thresholds, the low income tax offset, and the Medicare levy threshold amount and phase-in limit for senior Australians, to apply to assessments for the 2009-10 income year.

1.38 Item 30 provides for the changes to the personal income tax rates and thresholds, the low income tax offset, and the Medicare levy threshold amount and phase-in limit for senior Australians, to apply to assessments for the 2010-11 income year and later income years.

Consequential amendments

1.39 Consequential amendments are required to Schedules 8 and 10 of the Income Tax Rates Act 1986 to reflect the increases in the threshold where the 30 per cent marginal tax rate begins to apply. [Schedule 1, items 5, 6, 15, 16, 25 and 26]

Index

Schedule 1: Amendments