Personal income tax reform

In order to assist households with the potential costs of a price on carbon, the Government has announced changes to the personal income tax scales and thresholds. Firstly, the tax free threshold will be lifted from $6000 to $18 200 in 2012–13, and to $19 401 in 2015–16. Also, from 2012–13, the marginal tax rate paid on income between $19 401 and $37 000 will be increased from 15 per cent to 19 per cent, and the marginal tax rate on income between $37 001 and $80 000 will be lifted from 30 per cent to 32.5 per cent in 2012–13, and to 33 per cent in 2015–26. Table 1 summarises these proposals including changes to the low income tax offset (LITO).

Table 1: Proposed tax scales and the LITO

 

2011–12 (Current)

2012–13

2015–16

Threshold ($)

Marginal Rate

Threshold
 ($)

Marginal Rate

Threshold ($)

Marginal Rate

1st Rate

6,001

15%

18,201

19%

19,401

19%

2nd Rate

37,001

30%

37,001

32.5%

37,001

33%

3rd Rate

80,001

37%

80,001

37%

80,001

37%

4th Rate

180,001

45%

180,001

45%

180,001

45%

LITO

Up to $1,500

4% withdrawal rate on income over $30,000

Up to $445

1.5% withdrawal rate on income over $37,000

Up to $300

1% withdrawal rate on income over $37,000

Effective tax free threshold*

16,000

 

20,542

 

20,979

 

Source: Australian Government, Household assistance – tax reform, Clean energy future fact sheet, 10 July 2011, p. 3, viewed 13 July 2011, http://www.cleanenergyfuture.gov.au/wp-content/uploads/2011/06/09-FS-Household-Assistance-Tax-Reform-110708-1234hrs.pdf; Note: these tax scales do not include the Medicare levy or the flood levy. *Includes the effect of the tax free threshold and the LITO.

Currently, the LITO applies to low income earners with an income of less than $30 000, resulting in an effective tax free threshold of $16 000. This tax offset reduces by four cents in every dollar of income that exceeds $30 000 and cuts off at $67 500.[1] After the carbon price tax changes the LITO will apply to all income earners with an income of less than $37 000, and reduce by 1.5 cents of every dollar earned over that threshold in 2012–13 (combined with the tax free threshold of $18 201 this results in an effective tax free threshold for low income earners of $20 542). The rate of reduction will be one cent of every dollar earned over $37 000 in 2015–16 (combined with the tax free threshold of $19 401 this results in an effective tax free threshold for low income earners of $20 979).

Table 2 shows the impact the changes in the marginal tax rates and the LITO will have on the Budget from 2012–13 (in bold).


Table 2: Fiscal impact of the carbon price mechanism household assistance measures

 

Fiscal impact ($m)

2011–12

2012–13

2013–14

2014–15

Forward estimates

Household assistance measures

-1,533

-4,196

-4,802

-4,825

-15,356

Assistance for low - and middle-income households

-1,470

-4,096

-4,671

-4,700

-14,937

Increases in transfer payments

-1,470

-746

-2,301

-2,380

-6,897

Tax reform

0

-3,350

-2,370

-2,320

-8,040

Low Carbon Communities - redesign and extension

-5

-33

-78

-84

-200

Other household energy efficiency measures

-7

-13

-15

-13

-48

Household assistance implementation

-51

-54

-39

-28

-172

Source: Australian Government, Securing a clean energy future: the Australian Government’s climate change plan, Commonwealth of Australia, July 2011, p. 131, viewed 13 July 2011, http://www.cleanenergyfuture.gov.au/clean-energy-future/securing-a-clean-energy-future/

Changes to the tax free threshold and the LITO were recommended in the Australia’s Future Tax System Review (known as the Henry tax review). However, the Henry tax review recommended a higher tax free threshold of $25 000, partly achieved through the integration of offsets such as the LITO and the senior Australians tax offset into the personal income tax system. The final report of the Henry tax review suggested that integrating these offsets would simplify the system and make them available to all taxpayers. Also in a bid to simplify the personal income tax system, the review recommended applying the marginal tax rate of 35 per cent to 97 per cent of taxpayers. An example of the simplified tax scales in the report includes a tax free threshold of $25 000, a marginal tax rate of 35 per cent on income earned between $25 001 and $180 000, and a marginal tax rate of 45 per cent on income earned above $180 000.[2]

While the personal income tax reform announced as part of the carbon pricing mechanism differs from the recommendations of the Henry Review, it does go part of the way towards integrating the LITO into the tax free threshold. As can be seen in Table 3, which outlines the personal income tax scales since 1983–84, the nominal tax free threshold has historically remained at around the same level and has not changed since the introduction of the GST in 2000–01 when it was raised from $5400 to $6000. Lifting the threshold at which the first marginal rate of taxation applies from $6001 to $18 201 is therefore a significant change. In addition, Table 3 shows that the marginal rate of taxation applied to the first income bracket has been trending downwards since it was taxed at 30 per cent in 1983–84. The proposed increase of the first marginal tax rate from 15  per cent to 19 per cent will be the first increase in the lowest marginal income tax rate during the period covered by the table. The marginal rate applied to the first income bracket has been lower than the proposed 2012–13 rate of 19 per cent since the personal income tax reform introduced with the GST in 2000–01, when the first marginal rate of income taxation was reduced from 20 per cent to 17 per cent.

Table 3: marginal incoCarbonPricing_Taxme tax scales since 1983–84

Personal interaction with the taxation system is complex and depends on a variety of characteristics, thresholds and offsets. The Government has published an online calculator to indicate how the tax reform will affect individual taxpayers, which is available at: https://www.cleanenergyfuture.gov.au/helping-households/household-assistance-estimator/


[1] Taxpayers Australia, ‘The low income tax offset’, Taxpayers Australia website, viewed 13 July 2011, http://www.taxpayersassociation.com.au/tax-rebates-offsets/the-low-income-tax-offset.html

[2] K Henry, J Harmer, J Piggott, H Ridout and G Smith, ‘Part one: overview’, Australia’s future tax system: report to the Treasurer, Australia’s future tax system review, December 2009, pp. 29–30, viewed 15 July 2011, http://www.taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf




Last reviewed 21 July, 2011 by the Parliamentary Library Web Manager

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