Budget Review 2020–21 Index

Robert Anderson and Alicia Hall

The 2020–21 Budget proposes bringing forward stage two of the Government’s Personal Income Tax Plan (PITP) which was announced in the 2018–19 and 2019–20 Budgets and implemented by the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (the 2018 Act) and Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Act 2019 (the 2019 Act) respectively.

The personal income tax cuts proposed by the 2020–21 Budget were passed by Parliament on 9 October 2020 as Schedule 1 of the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 (the 2020 Bill).

Previous Legislation

The 2018 Act introduced three tranches of tax changes, which were subsequently amended by the 2019 Act.

Stage one changes in the 2018 and 2019 Acts were primarily targeted at those on lower taxable incomes by using tax offsets which phased out for those on higher taxable incomes. The changes in stage one legislated by the 2018 and 2019 Acts:

• increased the top income tax threshold for the 32.5 per cent tax rate from $87,000 to $90,000 from 2018–19 and
• introduced the Low and Middle Income Tax Offset (LMITO), which is a non-refundable tax offset for individuals with taxable incomes of up to $125,333. The maximum amount of the offset is $1,080 for those with taxable income between $48,000 and $90,000. Those with taxable income above $90,000 receive LMITO at a reduced rate, with it fully phasing out for individuals with taxable income of $125,333 or more.

Stage two, also legislated in the 2018 and 2019 Acts, was to commence in the 2022–23 income year and would have:

• increased the maximum rate of the existing Low-Income Tax Offset (LITO) from $445 to $700 per annum
• increased the top income threshold for the 32.5 per cent rate from $90,000 to $120,000
• increased the top income threshold for the 19 per cent marginal rate from $37,000 to $45,000 and
• removed the LMITO from the 2022–23 income year, at which point the stage two increases in the LITO and changes to tax thresholds would have ‘locked-in’ the tax reductions for lower income earners provided in stage one, whilst also providing additional tax cuts for those on higher taxable incomes.

Stage three, commencing in 2024–25, will extend the 32.5 per cent tax rate up to a taxable income of $200,000, abolishing the 37 per cent marginal tax rate entirely. The 45 per cent marginal tax rate will be retained for taxable income in excess of $200,000, as is currently the case for income in excess of $180,000. Stage three is unaffected by the changes in the 2020 Bill.

Additional information about the previously legislated changes is available in the Library’s Bills Digest.

Budget 2020-21 Tax Changes

The 2020–21 Budget brings forward all components of stage two of the 2018 and 2019 tax changes to the 2020–21 financial year. This stage was originally intended to come into effect in 2022–23.

In addition to bringing forward stage two, the LMITO is retained for the 2020–21 income year. This means that for the 2020–21 income year only, LMITO will apply on top of the stage two reductions (where it would have formerly ceased at the introduction of stage two in 2022–23).

As indicated in Table 1 below, this means that relative to the 2019–20 year:

• individuals with taxable income below $90,000 will receive an additional tax cut in the 2020–21 year from LMITO, but no additional tax cut once LMITO is removed from 2021–22
  • as outlined above, stage one of the PITP, which has already been legislated, provided tax cuts to those on lower taxable incomes
• individuals earning between $90,000 and $126,000 will receive an additional tax cut from LMITO for the 2020–21 income year, on top of cuts from the changes to tax thresholds in stage two, which will be retained for subsequent years and
• individuals with taxable income over $126,000 do not receive any benefit from LMITO, but receive tax cuts to tax thresholds in stage two, which are retained in subsequent years.

Table 1: tax cut relative to 2019–20

Source: Parliamentary Library analysis, based on the Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Act 2019 and the Treasury Laws Amendment (A Tax Plan for The Covid-19 Economic Recovery) Bill 2020.

The 2020–21 Budget does not propose any changes to stage three. As such, barring any future budgetary measures, the new 2020–21 tax rates will apply until the new tax thresholds come into effect in 2024–25.

Financial impact

As outlined in Budget Measures: Budget Paper No. 2: 2020–21, the tax changes are estimated to cause a substantial reduction in revenue in 2020–21 and 2021–22. As indicated in Table 2, this is partly offset in 2022–23 and 2023–24 due to timing impacts associated with LMITO no longer applying for the 2021–22 year, which affects tax collections in 2022–23 because LMITO is applied at the time that tax returns are assessed. The estimated net impact of the personal income tax changes over the four years of the forward estimates period is a reduction in the underlying cash balance of $17.8 billion.

Table 2: financial impacts of the Budget Measure: bringing forward the Personal Income Tax Plan and retaining the low and middle income tax offset

Source: Australian Government, Budget measures: budget paper no. 2: 2020–21, p. 18.

Distribution of taxation

Publicly available aggregated data of taxpaying individuals is available from the Australian Taxation Office (ATO), relating to the 2017–18 financial year. Although this information is now somewhat dated, we can use it to obtain an indication of the distribution of taxpayers across tax brackets. These figures only include ‘taxable individuals’. As such, they do not include the approximately 3.4 million individuals who submitted tax returns in 2017–18 with ‘net tax’ of zero (with net tax being the amount of tax owed before refundable credits are applied).

Table 3 shows the tax rates for recently legislated tax changes, compared to the tax rates in place directly before these changes were made, and the number of individuals, and proportion of taxpayers, within each tax bracket.

Table 3: 2017-18 distribution of taxable income

Source: ATO taxation statistics 2017–18, Individuals, Individual Table 16A.

Note: Data by percentile distribution is available from the ATO’s Taxation Statistics 2017–18. Where these don’t align to the tax brackets, the closest available figures are provided (that is, $37,000 ($37,131), $45,000 ($45,656), $90,000 ($91,126), $120,000 ($120,827), $180,000 ($185,648)).

This indicates that, compared to the previous 2019–20 tax rates, under the new tax regime:

• approximately 1.3 million individuals with taxable incomes of between $37,001 and $45,000 will have a lower tax rate on their income earned over $37,000
• approximately 1.2 million individuals with taxable incomes of between $90,001 and $120,000 will have a lower tax rate on their income of between $90,000 and $120,000
• approximately 8.5 million individuals with taxable incomes greater than $37,001 will benefit from the increase in the threshold of the 19 per cent income tax bracket and
• approximately 2.5 million individuals with taxable incomes greater than $90,000 will benefit from the increase in the threshold of the 32.5 per cent income tax bracket.

Whilst these changes indicate a downward shift in the total number of individuals who fall in each tax bracket, they do not necessarily indicate that all individuals in a new tax bracket will have a reduced tax liability compared with other years, as a number of other factors (including offsets like the LMITO, or changes in deductions) contribute to an individual taxpayer’s final tax amount.

All online articles accessed October 2020

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