Personal income tax cuts and the Medicare levy

Budget Review 2018–19 Index

Phillip Hawkins

The Treasurer, Scott Morrison, announced the Government’s Personal Income Tax Plan (PITP) in the 2018–19 Budget.[1] The PITP reduces personal income taxes over the next seven years through a combination of changes to tax offsets for low and middle income earners and changes in income tax thresholds. The changes will be implemented over three steps, commencing in 2018–19, 2022–23 and 2024–25. The 2018–19 changes are targeted at low and medium income earners, with the changes in 2022–23 and 2024–25 applying to individuals on higher taxable incomes.

The Government also announced in the Budget that it will not proceed with its proposal to increase the Medicare levy from 2 per cent to 2.5 per cent to fund the National Disability Insurance Scheme (NDIS).

Impact of the PITP

Figure 1 indicates the dollar value of total tax reductions provided under each stage of the PITP by taxable income. This demonstrates:

  • the changes commencing in the 2018–19 income year are beneficial across all taxable incomes. However, the benefit is larger for those individuals with taxable income below $125,333
  • the changes commencing in the 2022–23 income year primarily provide additional tax reductions to individuals with taxable incomes over $90,000
  • the changes commencing in the 2024–25 income year primarily provide an additional tax reduction to individuals with taxable income over $120,000

Figure 1: Combined impact of PITP changes (tax reduction per annum ($) by taxable income in 2018–19, 2022–23 and 2024–25)

Combined impact of PITP changes (tax reduction per annum ($) by taxable income in 2018–19, 2022–23 and 2024–25)

Source: Parliamentary Library analysis based on Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018.

 

Why is the Government taking this approach?

While the approach taken by the Government adds some complexity to the personal income tax system, utilising tax offsets to provide most of the income tax reductions in 2018-19 means that the initial tax cuts can be targeted to low and middle income earners. Tax offsets, as described further below, can be limited to taxpayers at particular taxable income levels and phased out for higher income earners.

In contrast, changes in income tax thresholds cannot be targeted in the same way. Australia’s progressive tax system applies higher marginal tax rates to income above particular income thresholds (zero for the first $18,200, 19 per cent between $18,200 and $37,000 and so on). This means that lifting an income tax threshold reduces the amount of tax paid by anyone with taxable income above that threshold. For example, increasing the tax threshold for the 32.5 per cent marginal tax rate from $87,000 to $90,000 benefits all individuals with taxable income over $87,000, not just those earning between $87,000 and $90,000. Anyone with taxable income above $87,000 would pay 32.5 per cent on any taxable income between $87,000 and $90,000 rather than the current 37 per cent.

Tax Offsets

What is a tax offset?

In order to understand the Government’s PITP it is important to understand tax offsets and how they differ from tax deductions.

Both deductions and offsets are ultimately used to reduce a taxpayer’s tax liability, but they operate differently:

  • deductions, such as expenses incurred in earning assessable income, are applied at the start of the tax return calculation to reduce an individual’s taxable income (the base to which the person’s marginal tax rate applies)
  • in contrast, tax offsets are applied at the end of the tax return calculation to directly reduce an individual’s tax liability.

The following is a simplified example (it ignores the Medicare levy):

An individual has assessable income of $100,000, work-related deductions of $30,000 and non-refundable tax offsets of $10,000.[2]

  • the person’s taxable income is $70,000 ($100,000 less $30,000 of deductions)
  • the tax amount on a taxable income of $70,000 (before offsets are applied) would be $14,297 based on 2016–17 marginal tax rates
  • after the $10,000 tax offset is applied the individual’s tax liability for the year would be $4,297
  • if the taxpayer was entitled to a tax offset of $15,000, then their tax liability would be zero (if the offset is a non-refundable one) or $703 (if the offset were a refundable one ($14,297 – $15,000))

Given that the Australian Tax Office (ATO) collects personal income tax throughout the year (income tax withholding), and deductions and offsets are effectively applied when the ATO processes a tax return (on assessment), an individual may be entitled to a refund of tax paid throughout the year.

Low and middle income tax offset (LAMITO)

In the 2018–19 income year a new Low and Middle Income Tax Offset (LAMITO) will be introduced. The LAMITO is a non-refundable tax offset of up to $530 per annum for resident taxpayers with a taxable income of up to $125,333. It will be applied as a lump-sum amount on assessment. The LAMITO will commence in the 2018–19 income tax year and will be in place for 4 years until 2021–22 (at which time other tax changes will effectively ‘lock-in’ these tax cuts).

LAMITO will provide the following tax benefit:[3]

  • individuals earning up to $37,000 will receive a LAMITO amount of up to $200 per annum[4]
  • individuals earning more than $37,000 but less than $48,000 will have their LAMITO amount increased from $200, by 3 cents in the dollar, to a maximum rate of $530
  • individuals earning between $48,000 and $90,000 will receive the maximum value of LAMITO of $530
  • individuals earning more than $90,000 will have their LAMITO amount reduced by $1.5 cents in the dollar until it phases out entirely for incomes of $125,333 and above.

LAMITO is provided in addition to the existing Low-Income Tax Offset (LITO) which provides an offset of up to $445 for individuals earning less than $37,000, and reduces by 1.5 cents in the dollar for every dollar over $37,000 until it phases out entirely for incomes over $66,667. Figure 2 illustrates the combined amount of LAMITO and LITO available for the 2018–19, 2019–20, 2020–21 and 2021–22 income years.

Figure 2. LAMITO and LITO for the 2018–19, 2019–20, 2020–21 and 2021–22 income years

LAMITO and LITO for the 2018–19, 2019–20, 2020–21 and 2021–22 income years

Source: Parliamentary Library analysis based on Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 and ATO website.

 

Low-income tax offset

In the 2022–23 income year the LAMITO will be rolled into the existing LITO and the LITO will be increased from $445 to $645 per year. The new LITO, as illustrated in Figure 3, will provide the following tax offset amount:[5]

  • individuals earning up to $37,000 will receive a LITO amount of up to $645 (equal to the combined amount of LITO and LAMITO in previous years)
  • individuals earning between $37,000 and $41,000 will have the new LITO amount reduced by 6.5 cents in the dollar for each dollar of income above $37,000 until their income reaches $41,000
  • individuals earning over $41,000 will have their LITO amount reduced further by 1.5 cents in the dollar until it phases out entirely for individuals earning more than $66,667.

There are no further proposed changes to these tax offsets in the third step commencing from the 2024‑25 income year.

Figure 3: Maximum LITO amount from 2022–23 onwards

Maximum LITO amount from 2022–23 onwards

Source: Parliamentary Library analysis based on Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018.

Tax thresholds

The PITP also makes changes to income tax thresholds in three steps in 2018–19, 2022–23 and 2024–25. These changes predominately affect middle and high income earners.

  • in the 2018–19 income year the threshold for the 32.5 per cent marginal tax rate will increase from $87,000 to $90,000[6]
  • in the 2022–23 income year the threshold for the 32.5 per cent marginal tax rate will increase from $90,000 to $120,000[7]
  • the final change in 2024–25 income year will abolish the 37 per cent tax bracket entirely and extend the marginal tax rate of 32.5 per cent to all taxable incomes between $40,001 and $200,000.[8]

As changes in income tax thresholds will change the amount that the ATO withholds from individuals income, these tax cuts will effectively be provided throughout the year instead of on assessment (as with tax offsets). 

The new proposed income tax schedules under each step (as estimated by the Parliamentary Library) are included at Attachment A.

Financial Impact

According to the 2018–19 Budget Papers the proposed PITP is estimated to reduce revenue by $13.4 billion over the Budget forward estimates period.[9] However, the forward estimates period does not include the changes scheduled to commence in 2022–23 and 2024–25. The Government has confirmed that the estimated cost of the proposal over 10 years will be $140 billion but has stated a year by year estimate of this figure would be unreliable.[10]

Legislation

The Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 (the Bill), which seeks to implement the Government’s PITP was, introduced into the House of Representatives on 9 May 2018. The Bill seeks to implement all elements of the PITP. The Treasurer has confirmed that the Government will seek to legislate all elements of the PITP in the same Bill.[11] This is despite reported calls from the Opposition and other cross-bench senators to consider each set of changes separately.[12]

ALP position

The Australian Labor Party (ALP) has announced that it will support the introduction of the PITP changes that commence in 2018–19; namely the introduction of the LAMITO and the increase in the 32.5 per cent tax rate threshold to $90,000.[13]

The ALP has also announced   that from the 2019-20 income year they would provide a permanent tax offset with a maximum amount of $928 per year for individuals with taxable income less than $125,000, $398 more than the maximum amount of LAMITO.[14]

Not proceeding with the increase in the Medicare Levy

In the 2018–19 Budget the Government announced that it would no longer proceed with its plan (announced in the 2017–18 Budget)[15] to increase the Medicare levy. This is expected to reduce Government revenue by $12.8 billion over the forward estimates period. In a speech to Australian Business Economists on 26 April 2018 the Treasurer stated that the increase in the Medicare levy was no longer needed as a result of the better fiscal position outlined in the Budget.[16] The Government has indicated that it intends to fully fund the NDIS by ‘continuing to deliver a stronger economy and by ensuring the Government lives within its means.’[17] The ALP has also stated that it would not proceed with its proposal to increase the Medicare levy for individuals with taxable income greater than $87,000.


Attachment A: Proposed personal income tax rates for resident individuals under the PITP[18]

Table 1: Personal income tax rates applying in the 2017–18 income year

Taxable income Tax on this taxable income
$0 – $18,200 Nil
$18,201 - $37,000 19 cents for each $1 over $18,200
$37,001 - $87,000 $3,572 plus 32.5 cents for each $1 over $37,000
$87,001 - $180,000 $19,822 plus 37 cents for each $1 over $87,000
$180,001 and over $54,232 plus 45 cents for each $1 over $180,000

Source: ATO website.

Table 2: Personal income tax rates applying in the 2018–19, 2019–20, 2020–21 and 2021–22 income years

Taxable income Tax on this taxable income
$0 - $18,200 Nil
$18,201 - $37,000 19 cents for each $1 over $18,200
$37,001 - $90,000(a) $3,572 plus 32.5 cents for each $1 over $37,000
$90,001(a) - $180,000 $20,797 plus 37 cents for each $1 over $90,000
$180,001 and over $54,097 plus 45 cents for each $1 over $180,000

(a) $87,000 threshold raised to $90,000 from 2018–19 income year

Source: Parliamentary Library analysis based on Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 and explanatory memorandum.

Table 3: Personal income tax rates applying in the 2022–23 and 2023–24 income years

Taxable income Tax on this income
$0 - $18,200 Nil
$18,200 - $41,000(a) 19 cents for each $1 over $18,200
$41,001(a) – $120,000(b) $4,332 plus 32.5 cents for each $1 over $41,000
$120,001(b) - $180,000 $30,007 plus 37 cents for each $1 over $120,000
$180, 001 and over $52,207 plus 45 cents for each $1 over $180,000

(a) $37,000 income threshold raised to $41,000 from 2022-23 income year

(b) $90,000 income threshold raised to $120,000 from 2022-23 income year

Source: Parliamentary Library analysis based on Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 and explanatory memorandum.

Table 4: Personal income tax rates applying from the 2024–25 income onwards

Taxable income Tax on this income
$0 – $18,200 Nil
$18,201 - $41,000 19 cents for each $1 over $18,200
$41,001 - $200,000(a) $4,332 plus 32.5 cents for each $1 over $41,000
37 cents in the dollar threshold abolished*
$200,001* and over $56,007 plus 45 cents for each $1 over $200,000

(a) 37 cents in the dollar tier abolished and 32.5 cents in the dollar threshold raised to $200,000.

Source: Parliamentary Library analysis based on Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 and explanatory memorandum.

 


[1].          Australian Government, Budget measures: budget paper no. 2: 2018–19, pp. 33–34.

[2].          Tax offsets may be non-refundable or refundable, the difference being that a non-refundable tax offset can only reduce the amount of tax that someone pays to zero in a financial year. Refundable tax offsets can reduce the amount of tax antax liability to an amount less than zero, which results in a refund

[3].          Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018, p. 4.

[4].          Because LAMITO and LITO are non-refundable, the maximum amount of LAMITO and LITO that can be claimed will be limited to the person’s tax liability prior to applying the offset.

[5].          Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018, p. 7.

[6].          Ibid., p. 13.

[7].          Ibid., pp. 13–14.

[8].          Ibid., p. 14.

[9].          Australian Government, Budget measures: budget paper no. 2: 2018–19, pp. 33–34.

[10].       S Morrison (Treasurer), Interview with Barrie Cassidy, ABC Insiders, transcript, 13 May 2018.

[11].       Ibid.

[12].       AAP, ‘Pressure on coalition to split tax plan, SBS News, 11 May 2018.

[13].       B Shorten (Leader of the Opposition) and Chris Bowen (Shadow Treasurer), Tax Refund For Working Australians – Bigger, Better & Fairer, Media release, 10 May 2018

[14].       Ibid.

[15].       Australian Government, Budget measures: budget paper no. 2: 2017–18, pp. 24–25.

[16].       S Morrison (Treasurer), ‘Lower taxes for a stronger economy: address to the Australian Business Economists’, Sydney, 26 April 2018.

[17].       Ibid.

[18].       The following tables do not include the impact of the Medicare levy.

 

All online articles accessed May 2018.

For copyright reasons some linked items are only available to members of Parliament.


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