Taxation - personal income tax

Budget Review 2010-11 Index

Budget 2010–11: Taxation

Personal income tax

Les Nielson

Overall, the 2010–11 Federal Budget made few changes to the personal income tax regime. This brief covers the major, already legislated, changes to commence on 1 July 2010 and the changes proposed in the Budget.

Already legislated changes—personal income tax rates

As previously legislated, the personal income tax rates will reduce from 1 July 2010, as shown in the following tables. The current personal income tax rates are as follows:

Marginal personal income tax rates 2009–10

Source: Parliamentary Library estimates

On 1 July 2010 the personal income tax rates will change to the following:

Marginal personal income tax rates 2010–2011

Source: Parliamentary Library estimates

The Low Income Tax Offset (LITO) will increase to $1500 per annum in the 2010–11 tax year (compared with $1350 in the previous year) giving a tax free income threshold of $16 000 for taxpayers with incomes up to $30 000 per annum in 2010–11 (compared with $15 000 in the previous year).^[1] The LITO is no longer available once the taxpayer’s income reaches $67 500 in 2010–11. The following table illustrates the effect of the above changes:

Income tax rate and LITO changes net effect 2009–10 and 2010–11 $ p.a.

Source: Parliamentary Library estimates

Changes announced in the 2010–11 Budget

Medicare levy changes

The government proposes to increase the low income Medicare levy threshold with effect from 1 July 2009, i.e. for the current financial year. This threshold is the annual income level below which no Medicare levy is payable.

The new thresholds are $18 488 for a single person (up from $17 794 for 2008–09) and $31 196 for a family (up from $30 025 for 2008–09). Each dependent student or child increases the threshold by $2865 (up from $2787 for 2008–09). Pensioners (such as disability pensioners), who are below Age Pension Age (65 but increasing to 67 over the next 13 years) will also receive an increase in this threshold to $27 697 for the 2009–10 tax year, compared with $25 299 for the 2008–09 tax year.^[2]

Tax offsets

The net medical expenses tax offset allows a person to claim a tax offset equal to 20 per cent of unreimbursed eligible medical expenses above a set threshold, currently $1500 p.a. For example, if a person has $1600 worth of unreimbursed eligible medical expenses in a tax year they may claim a tax offset of $20, which is equal to 20 per cent of $100.

The government proposes to raise this annual threshold to $2000 from 1 July 2010 and index it to the consumer price index from 1 July 2011.^[3] This threshold was last increased in 2002–03.

Tax deductions

From 1 July 2011, the government proposes to provide individual taxpayers with a 50 per cent tax discount in respect of the first $1000 of interest earned from bank accounts, bonds, debentures and annuity products.^[4]

Though details of this proposed measure are still to be finalised, the workings of the proposed tax discount appear to be similar to the current 50 per cent discount on taxable capital gains, whereby 50 per cent of realised capital gains are exempt from tax^[5] . Taking this approach as a model for the proposed measure, 50 per cent of the first $1000 in interest earned from the above products would not be subject to personal income tax. This makes the measure a tax deduction (rather than a tax offset) because it reduces a taxpayer’s taxable income.

Assuming a six per cent per annum interest rate, the full 50 per cent discount would apply to individuals with a saving balance of up to $16 666.67. However, individuals with savings balances above this level will only be eligible for a $500 tax deduction.^[6]

The government has noted that, assuming the benefit gained from the discount is reinvested each year, a middle-income taxpayer with $17 000 invested at 6 per cent per annum will, after five years, have a balance almost $1000 higher than if they had not received the discount.^[7]

The proposed measure implements a revised version of a recommendation of the Henry Tax Review.^[8]

From 1 July 2012, personal income taxpayers will have a choice when filing their tax returns. Either they can continue to claim itemised work-related expenses and the cost of managing tax affairs as tax deductions (backed up by the relevant receipts etc. should that prove necessary) or they can claim a standard $500 tax deduction. This standard deduction amount will rise to $1000 in the 2013–14 tax year.^[9]

This particular measure, designed to free most personal taxpayers from having to prepare a tax return, was proposed in the recent Henry Tax Review.^[10]

[1].    Australian Government, Budget strategy and outlook: budget paper no. 1: 2010–11, Commonwealth Of Australia, Canberra, 2010, p. 1–12, viewed 12 May 2010, http://www.aph.gov.au/Budget/2010-11/content/bp1/download/bp1.pdf

[2].    Australian Government, Budget measures: budget paper no. 2: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 36, viewed 12 May 2010, http://www.aph.gov.au/Budget/2010-11/content/bp2/download/bp2.pdf

[3].    Ibid, p. 35.

[4].    Australian Government, Budget measures: budget paper no. 2, op. cit., p. 38.

[5].    Australian Government, Budget strategy and outlook: budget paper no. 1, op. cit., p. 1–27.

[6].    W Swan (Treasurer), Improving incentives for savings to benefit 5.7 million Australians, media release, no. 036, 11 May 2010, viewed 12 May 2010, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2010/036.htm&pageID=003&min=wms&Year=&DocType=0

[7].    Australian Government, Budget strategy and outlook: budget paper no. 1, op. cit., p. 1–27.

[8].    K Henry (Chair),et al, op. cit., p. 83.

[9].    Ibid, p. 47.

[10]. K Henry (Chair), J Harmer, J Piggott, H Ridout, G Smith, ‘Part One: Overview’, Australia’s Future Tax System: Report to the Treasurer, Canberra, December 2009, p. 83.