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)
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
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
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.
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