House of Representatives

Explanatory Memorandum

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

Chapter 6: Low and middle income tax offset

Outline of chapter

6.1 Schedule 6 to the main Bill amends the ITAA 1997 to increase the low and middle income tax offset for the 2021-22 income year by $420 to ease cost of living pressures for Australians.

Context of amendments

6.2 In the 2022-23 Budget, the Government announced that it would increase the low and middle income tax offset for the 2021-22 income year to help ease cost of living pressures for Australians.

6.3 A person is liable to pay income tax in Australia with reference to their taxable income for the income year. The amount of income tax payable is calculated by applying the applicable income tax rate to your taxable income and then reducing it by your tax offsets for the income year.

6.4 Income tax law also provides for a number of tax offsets, which are reductions in the income tax that would otherwise be payable by taxpayers that satisfy the specified requirements. Many of these offsets are contained in Division 61 of the ITAA 1997.

6.5 Subdivision 61-D of the ITAA 1997 provides for one such 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.

6.6 Schedule 6 to the main Bill gives effect to the Government's announcement in the 2022-23 Budget by amending Subdivision 61-D of the ITAA 1997 to increase the low and middle income tax offset for eligible individuals (and trustees) by $420 for the 2021-22 income year.

Summary of new law

6.7 Schedule 6 to the main Bill amends the ITAA 1997 to increase the low and middle income tax offset by $420 for the 2021-22 income year.

6.8 The increase in the low and middle income tax offset will apply to:

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individuals

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who are Australian residents at any time during the 2021-22 income year; and

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whose taxable income for the 2021-22 income year is less than $126,000; or

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trustees

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who are liable to be assessed under section 98 of the Income Tax Assessment Act 1936 in respect of a share of the net income of a trust;

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the beneficiary who is presently entitled to that share is an individual who is an Australian resident at any time during the income year; and

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that share is less than $126,000.

Comparison of key features of new law and current law

Table 6.1 Comparison of new law and current law

Detailed explanation of new law

6.9 The low and middle income tax offset amount is increased by $420 for the 2021-22 income year. [Schedule 6, item 3, subsection 60-107(1A) of the ITAA 1997]

6.10 This increase applies to eligible persons who have a taxable income that is less than $126,000 for the 2021-22 income year (i.e. persons who are entitled to a low and middle income tax offset amount of greater than $0 for the 2021-22 income year). [Schedule 6, item 3, paragraph 60-107(1A)(b) of the ITAA 1997]

6.11 The increase of $420 applies to persons in each of the four income thresholds to which the existing low and middle income tax offset applies. As a result:

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persons with taxable incomes below $37,000 would be entitled to a total tax offset amount of $675;

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persons with taxable incomes exceeding $37,000 but not more than $48,000 would be entitled to a total tax offset amount of $675, plus 7.5 cents for every dollar above $37,000;

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persons with taxable incomes exceeding $48,000 but not more than $90,000 are entitled to a tax offset amount of $1,500; and

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persons with taxable income exceeding $90,000 but less than $126,000 are entitled to a tax offset amount of $1,500 less 3 cents for every dollar above $90,000.

6.12 In accordance with the existing law, the low and middle income tax offset does not apply to persons who have a taxable income for the 2021-22 income year that exceeds $126,000.

6.13 The low and middle income tax offset can only reduce the amount of tax payable on an individual's taxable income to a minimum of $0. Any offset amount that remains once an individual's tax payable is zero is not refunded. As a result, some individuals will not have sufficient tax liability to use the entire amount of the additional offset.

6.14 All of the other features of the existing low and middle income tax offset, including the taper-in and taper-out rates and the integrity rules applying to persons below the age of 18 years, remain unchanged. [Schedule 6, item 4, subsections 60-107(2) and (4) of the ITAA 1997]

6.15 Sections 60-105 and 60-107 of the ITAA 1997, which provide for the low and middle income tax offset, will be repealed on 1 July 2022 by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020. Schedule 6 to the main Bill amends the notes under subsections 60-105(3) and 60-107(1) of the ITAA 1997 to update these references. [Schedule 6, items 1 and 2, subsections 60-105(3) and 60-107(1) of the ITAA 1997]

Commencement, application, and transitional provisions

Commencement

6.16 The amendments to the low and middle income tax offset in Schedule 6 to the main Bill commence on the day after the main Bill receives Royal Assent.

Application

6.17 The amendments to the low and middle income tax offset only apply to the 2021-22 income year. [Schedule 6, Item 3, subsection 61-107(1A) of the ITAA 1997]