Personal tax cuts: low–mid tax offset increase now; more rate changes from 2022
In the 2019–2020 Federal Budget, the Coalition Government announced its intention to provide further reductions in tax through the non-refundable low and middle income tax offset (LMITO).
Under the changes, the maximum reduction in an eligible individual’s tax from the LMITO will increase from $530 to $1,080 per year. The base amount will increase from $200 to $255 per year for 2018–2019, 2019–2020, 2020–2021 and 2021–2022 income years. In summary:
- The LMITO will now provide a tax reduction of up to $255 for taxpayers with a taxable income of $37,000 or less.
- For taxable incomes between $37,000 and $48,000, the value of the offset will increase by 7.5 cents per dollar to the maximum offset of $1,080.
- Taxpayers with taxable incomes between $48,000 and $90,000 will be eligible for the maximum offset of $1,080.
- For taxable incomes of $90,000 to $126,000 the offset will phase out at a rate of 3 cents per dollar.
- Individuals will receive the LMITO on assessment after lodging their tax returns for 2018–2019, 2019–2020, 2020–2021 and 2021–2022. This is designed to ensure that taxpayers receive a benefit when lodging returns from 1 July 2019.
Low and middle income tax offset (proposed for 2018-19 to 2021-22)
|Taxable income (TI)||LMITO|
|$0 – $37,000||$255|
|$37,001 – $48,000||$255 +([TI-$37,000] x 7.5%)|
|$48,001 – $90,000||$1,080|
|$90,001 – $125,999||$1,080 – ([TI – $90,000] x 3%)|
Rate and threshold changes from 2022 and beyond
From 1 July 2022, the Government proposes to increase the top threshold of the 19% personal income tax bracket from $41,000 to $45,000.
Also from 1 July 2022, the Government proposes to increase the low income tax offset (LITO) from $645 to $700. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000 (instead of at 6.5 cents per dollar between taxable incomes of $37,000 and $41,000 as previously legislated). LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.
Together, the increased top threshold of the 19% personal income tax bracket and the changes to LITO would lock in the tax reduction provided by LMITO, when LMITO is removed.
From 2024–2025, the Government intends to reduce the 32.5% marginal tax rate to 30%. This will more closely align the middle personal income tax bracket with corporate tax rates.
In 2024–2025 an entire tax bracket – the 37% tax bracket – will be abolished under the Government’s already-legislated plan. With these changes, by 2024–2025 around 94% of Australian taxpayers are projected to face a marginal tax rate of 30% or less.
Therefore, under the changes announced in the Budget, from 2024–2025 there would only be three personal income tax rates: 19%, 30% and 45%. From 1 July 2024, taxpayers earning between $45,000 and $200,000 will face a marginal tax rate of 30%.
The proposed changes are shown in the following table:
Tax rates and income thresholds
|Tax rates in 2017-18||Thresholds in 2017-18||New rates in 2024-25||New thresholds in 2024-25|
|Nil||$0 – $18,200||Nil||$0 – $18,200|
|19%||$18,201 – 37,000||19%||$18,201 – $45,000|
|32.5%||$37,001 – $87,000||30%||$45,001 – $200,000|
|37%||$87,001 – $180,000||–||–|
|45%||Above $180,000||45%||Above $200,000|
|LITO in 2017-18||Up to $445||LITO in 2024-25||Up to $700|
The Government says these changes will maintain a progressive tax system. It is projected that in 2024–2025 around 60% of all personal income tax will be paid by the highest earning 20% of taxpayers – which is broadly similar to that cohort’s share if 2017–2018 rates and thresholds were left unchanged. The share of personal income tax paid also remains similar for the top 1%, 5% and 10% of taxpayers.
Under its Budget announcements, the Government says an individual with taxable income of $200,000 may be earning 4.4 times more income than an individual with taxable income of $45,000, but in 2024–2025 the higher-income person will pay around 10 times more tax.
Medicare levy low-income thresholds for 2018–2019
For the 2018–2019 income year, the Medicare levy low-income threshold for singles will be increased to $22,398 (up from $21,980 for 2017–2018).
For couples with no children, the family income threshold will be increased to $37,794 (up from $37,089 for 2017–2018). The additional amount of threshold for each dependent child or student will be increased to $3,471 (up from $3,406).
For single seniors and pensioners eligible for the seniors and pensioners tax offset (SAPTO), the Medicare levy low-income threshold will be increased to $35,418 (up from $34,758 for 2017–2018). The family threshold for seniors and pensioners will be increased to $49,304 (up from $48,385), plus $3,471 for each dependent child or student.
The increased thresholds will apply to the 2018–2019 and later income years. Note that legislation is required to amend the thresholds, so a Bill will be introduced shortly.
Social security income automatic reporting via Single Touch Payroll
The Government intends to automate the reporting of individuals’ employment income for social security purposes through Single Touch Payroll (STP).
From 1 July 2020, income support recipients who are employed will report income they receive during the fortnight, rather than calculating and reporting their earnings. Each fortnight, income data received through an expansion of STP data-sharing arrangements will also be shared with the Department of Human Services, for recipients with employers utilising STP.
This measure will assist income support recipients by greatly reducing the likelihood of them receiving an overpayment of income support payments (and subsequently being required to repay it).
The measure is expected to save $2.1 billion over five years from 2018–2019. The Government says the efficiencies from this measure will be derived through more accurate reporting of incomes. This measure will not change income support eligibility criteria or maximum payment rates. The resulting efficiencies will be redirected by the Government to repair the Budget and fund policy priorities.
The Government will provide $82.4 million over four years from 2019–2020 to the ATO and the Department of Veterans’ Affairs to support the expansion of the data collected through STP by the ATO and the use of this data by Commonwealth agencies.
STP data will be expanded to include more information about gross pay amounts and other details. These changes will reduce the compliance burden for employers and individuals reporting information to multiple Government agencies.
Disclaimer: This article is not advice and readers should not act solely on the basis of the material contained in this article. The Budget measures are only statements of proposed changes, and are not yet law. With an election expected to occur in May 2019, it is still uncertain whether these proposals will become law. Changes in legislation may occur quickly. We therefore recommend that formal advice be sought before acting in any of the areas identified in this article.