The Government introduced Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 on 10 May 2018, one day after the 2018/19 Federal Budget. This is to give effect to the income tax changes for individuals, announced in the Budget. On 21 June 2018, it passed, all stages, and received Royal Assent as Act No. 47.
Earlier, on 10 May 2018, the Bill was referred to the Senate Economics Legislation Committee for inquiry. It recommended that the Bill be passed, albeit with a dissenting Labor senator’s report (splitting on party lines), who said that the Government can’t afford the cost of these tax cuts.
Schedule 2 of the Bill will give effect to the main headline item, which is to significantly increase the marginal rate income thresholds, over the 7 years (completed in the 2024/25 financial year). This will include abolishing the 37% rate, altogether, in Phase 3 (see below).
The Act amends the Income Tax Rates Act 1986, for individuals, in the manner set out in the table below. The key feature of the eventual regime will be a massive income range over which the 32.5% marginal tax rate applies, namely: from $40k to $200k. A description of these changes are as follows.
- From the beginning of the 2018/19 year, the maximum income threshold, for the 32.5% tax bracket, will increase from $87,000 to $90,000 (that is, from 1 July 2018). This is by way of immediate relief from the effects of ‘bracket creep’ on middle income earners, who could, otherwise, be pushed into the 37% marginal rate.
- Four years later (in 2022-23), two thresholds will change. The first is that the maximum income threshold, for the 19% tax bracket, will increase from $37,000 to $41,000. Second, the maximum income threshold, for the 32.5% bracket will increase from $90,000 to $120,000 (from 1 July 2022, also).
- Two years later, again (2024/25), the maximum threshold, for the 32.5% income tax bracket, will be increased from $120,000 to $200,000, whilst the 37% tax rate will be abolished (giving the $40k – $200k band of income over which the 32.5% marginal tax rate applies – accounting for an estimated 73% of taxpayers). At that point the the unchanged maximum marginal rate of tax (45%) will cut in at $200,001 – an increase from $180,001 (and will apply to an estimated 6% of taxpayers – up from 5%). The proportion of nil rate taxpayers is estimated to decrease from 3% to 2% and the proportion of taxpayers on the 19% rate (where the top threshold increased slightly, from $37,000 to $41,000) is estimated to remain the same at 19%.
Tax rates and thresholds for 2018-19 onwards
The following table reflects the personal tax rate and threshold changes (highlighted in bold), excluding the 2% Medicare levy:
| Rate | 2018-19 to 2021-22 | 2022-23 and 2023-24 | 2024-25 onwards |
|---|---|---|---|
| 0% | $0 – $18,200 | $0 – $18,200 | $0 – $18,200 |
| 19% | $18,201 – 37,000 | $18,201 – 41,000 | $18,201 – $41,000 |
| 32.5% | $37,001 – 90,000 | $41,001 – 120,000 | $41,001 – $200,000 |
| 37% | $90,001 – $180,000 | $120,001 – $180,000 | N/A |
| 45% | $180,001+ | $180,001+ | $200,001+ |
LITO & LaMITO changes
- In 2022-23, the Low Income Tax Offset (LITO) will increase from $445 to $645. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.
- It will introduce a non-refundable low and middle income tax offset (LaMITO) in the 2018-19, 2019-20, 2020-21 and 2021-22 income years. The amount of the low and middle income tax offset is: $200 for taxpayers with income not exceeding $37,000. Between $37,000 and $48,000, the value of the offset will increase at a rate of 3 cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. From $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar. The benefit of the Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset. The Bill also proposes to merge the low and middle income tax offset and the LITO into a more generous new low income tax offset for 2022-23 and later income years.
[APH website: Bills Tracker, Personal Taxes Bill, EM; Vine – Budget Edition; FJM; LTN 87, 9/5/18; LTN 98, 24/5/18; LTN 115, 19/6/18; LTN 117, 21/6/18; KPMG, 21/6/18; Tax Month June 2018]
Study questions (answers available)
- Does this in income tax phase in over 5 years?
- By this time, will a single 32.5% marginal tax rate apply to an estimated 73% of taxpayers, over an income range from $40,001 to $200,000?
- Is there modest bracket creep relief, this year (2017/18) – being an extension of the maximum income threshold, for the 32.5% marginal tax rate bracket, from $87,000 to $90,000?
- Will the eventual $200,001 cut in point, for the unchanged maximum marginal rate (of 45%), start at the same income level as before?
