On 21 June 2018, the Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 received Royal Assent. The legislation gives effect to the Government’s seven-year Personal Income Tax Plan announced on 8 May 2018 as part of the 2018/19 Federal Budget.

The Personal Income Tax Plan which provides targeted tax relief over seven years for low and middle income earners and protects middle income Australians from bracket creep consists of three steps:

targeted tax relief for low and middle income earners;

protecting middle income Australians from bracket creep; and

ensuring Australians pay less tax by making the system simpler.

The Act amends the ITAA 1936, the ITAA 1997 and the Income Tax Rates Act 1986 to give effect to the 2018/19 Federal Budget announcement as follows:

for the 2018/19 to 2021/22 years — introduces a temporary Low and Middle Income Tax Offset in addition to the existing Low Income Tax Offset (LITO);

for 2022/23 and later income years — replaces the temporary Low and Middle Income Tax Offset and the existing LITO with a new Low Income Tax Offset; and

from the 2018/19, 2022/23 and 2024/25 income years — changes the thresholds at which the marginal tax rates apply.

Tax offsets for low and middle income earners

Currently, Australian resident individuals with taxable income that does not exceed $66,667 are entitled to the LITO. The amount of the LITO is $445 reduced by 1.5% of the amount by which the taxpayer’s taxable income exceeds $37,000.

The Low and Middle Income Tax Offset is available for the 2018/19 to 2021/22 income years to Australian resident individuals that have taxable income not exceeding $125,333 for that income year. The Low and Middle Income Tax Offset operates in addition to the LITO for the first four years of the Government’s Personal Income Tax Plan and taxpayers may be entitled to receive both offsets during this time.

The amount of the offset will depend on a taxpayer’s relevant income level, as set out in the following table:

Relevant income for the

2018/2019 to 2021/2022 income years Low and Middle Income Tax Offset amount $37,000 or less $200 $37,001 – $48,000 $200, plus 3% of the amount of relevant income exceeding $37,000 (to a maximum benefit of $530) $48,001 – $90,000 $530 (maximum) $90,001 – $125,333 $530, less 1.5% of the amount of relevant income exceeding $90,000

Source: Treasury

The Low and Middle Income Tax Offset:

is not available to reduce tax payable on unearned income of minors (which is taxed at penalty rates);

is non-refundable and cannot be carried forward or transferred; and

does not have to be applied in priority to other non-refundable tax offsets.

The new Low Income Tax Offset replaces both the Low and Middle Income Tax Offset and the LITO in the 2022/23 and later income years. The new offset is available to Australian resident individuals if their taxable income for the relevant income year does not exceed $66,667.

The amount of the new offset depends on a taxpayer’s relevant income level, as set out in the following table:

Relevant income for the

2022/2023 and later income years New Low Income Tax Offset amount $37,000 or less $645 $37,001 – $41,000 $645, less 6.5% of the relevant income that exceeds $37,000 $41,001 – $66,667 $385, less an amount equal to 1.5% of the relevant income that exceeds $41,000

Source: Treasury

The current LITO will be repealed after the introduction of the new Low Income Tax Offset in the 2022/23 income year.

Changes to marginal tax rates

The current personal income tax thresholds — which have applied since 1 July 2016 — are as set out in the following tables:

Current tax rates – Australian residents

Taxable income Rate Current tax payable $0 – $18,200 0% Nil $18,201 – $37,000 19% Nil + 19% of amounts over $18,200 $37,001 – $87,000 32.5% $3,572 + 32.5% of amounts over $37,000 $87,001 – $180,000 37% $19,822 + 37% of amounts over $87,000 $180,000 + 45% $54,232 + 45% of amounts over $180,000

Source: ATO

Current tax rates – Foreign residents

Income thresholds Rate Current tax payable $0 – $87,000 32.5% Nil + 32.5% of amounts over $0 $87,001 – $180,000 37% $28,275 + 37% of amounts over $87,000 $180,000 + 45% $62,685 + 45% of amounts over $180,000

Source: ATO

Current tax rates – Working holiday makers

Taxable income of WHM Rate Current tax payable $0 – $37,000 15% 15% of excess over $0 $37,001 – $87,000 32.5% $5,550 + 32.5% of amounts over $37,000 $87,001 — $180,000 37% $21,800 + 37% of amounts over $87,000 $180,000 + 45% $56,210 + 45% of amounts over $180,000

Source: ATO

The legislation gives effect to the following changes to the personal income tax thresholds — and rates of tax applicable to them — which the Treasurer announced on 8 May 2018 as part of the 2018–19 Federal Budget:

From 1 July 2018, the taxable income threshold above which an individual who is taxed at a rate of 37% is increased from $87,000 to $90,000 for both Australian resident and foreign resident taxpayers (for both ordinary taxable income and working holiday-maker taxable income).

From 1 July 2022, the thresholds above which the second and third rates of income tax apply have been increased as follows:

Existing threshold Threshold from 1 July 2022 Tax rate applicable above threshold $37,000 $41,000 19% $90,000 $120,000 32.5%

Source: Treasury

From 1 July 2024, the 37% tax rate will be abolished and the threshold above which taxable income is taxed at a rate of 45% will be increased to $200,000.

The current thresholds and tax rates and the changes to be phased in for Australian residents are summarised in the following table.

Tax rate changes – Australian residents

2016/2017 and

2017/2018 2018/2019, 2019/2020, 2020/2021 and 2021/2022 2022/2023 and 2023/2024 From 2024/2025 Taxable income Tax rate Taxable income Tax rate Taxable income Tax rate Taxable income Tax rate 0 to $18,200 Nil 0 to $18,200 Nil 0 to $18,200 Nil 0 to $18,200 Nil $18,201 – $37,000 19% for amounts over $18,200 $18,201 – $37,000 19% for amounts over $18,200 $18,201 – $41,000 19% for amounts over $18,200 $18,201 – $41,000 19% for amounts over $18,200 $37,001 – $87,000 $3,572 + 32.5% for amounts over $37,000 $37,001 – $90,000 $3,572 + 32.5% for amounts over $37,000 $41,001 – $120,000 $4,332 + 32.5% for amounts over $41,000 $41,001 – $200,000 $4,332 + 32.5% for amounts over $41,000 $87,001 – $180,000 $19,822 + 37% for amounts over $87,000 $90,001 – $180,000 $20,797 + 37% for amounts over $90,000 $120,001 – $180,000 $30,007 + 37% for amounts over $120,000 $180,001 and over $54,232 + 45% for amounts over $180,000 $180,001 and over $54,097 + 45% for amounts over $180,000 $180,001 and over $52,207 + 45% for amounts over $180,000 $200,001, and over $56,007 + 45% for amounts over $200,000

Source: Treasury

The current thresholds and tax rates and the changes to be phased in for foreign residents are summarised in the following table.

Tax rate changes – Foreign residents

2016/2017 and

2017/2018 2018/2019, 2019/2020, 2020/2021 and 2021/2022 2022/2023 and 2023/2024 From 2024/2025 Taxable income Tax rate Taxable income Tax rate Taxable income Tax rate Taxable income Tax rate 0 – $87,000 32.5% for each dollar 0 – $90,000 32.5% for each dollar 0 – $120,000 32.5% for each dollar 0 – $200,000 32.5% for each dollar $87,001 – $180,000 $28,275 + 37% for amounts over $87,000 $90,001 – $180,000 $29,250 + 37% for amounts over $90,000 $120,001 – $180,000 $39,000 + 37% for amounts over $120,000 $200,001 and over $65,000 + 45% for amounts over $200,000 $180,001 and over $62,685 + 45% for amounts over $180,000 $180,001 and over $62,550 + 45% for amounts over $180,000 $180,001 and over $61,200 + 45% for amounts over $180,000

Source: Treasury

The current thresholds and tax rates and the changes to be phased in for working holiday-makers are summarised in the following table:

Tax rate changes – Working holiday makers

2016/2017 and

2017/2018 2018/2019, 2019/2020, 2020/2021 and 2021/2022 2022/2023 and 2023/2024 From 2024/2025 Taxable income Tax rate Taxable income Tax rate Taxable income Tax rate Taxable income Tax rate 0 – $37,000 15% for each dollar 0 – $37,000 15% for each dollar 0 – $41,000 15% for each dollar 0 – $41,000 15% for each dollar $37,001 – $87,000 $5,550 + 32.5% for amounts over $37,000 $37,001 – $90,000 $5,550 + 32.5% for amounts over $37,000 $41,001 – $120,000 $6,150 + 32.5% for amounts over $41,000 $41,001 – $200,000 $6,150 + 32.5% for amounts over $41,000 $87,001 – $180,000 $21,800 + 37% for amounts over $87,000 $90,001 – $180,000 $22,775 + 37% for amounts over $90,000 $120,001 – $180,000 $31,825 + 37% for amounts over $120,000 $200,001 and over $57,825 + 45% for amounts over $200,000 $180,001 and over $56,210 + 45% for amounts over $180,000 $180,001 and over $56,075 + 45% for amounts over $180,000 $180,001 and over $54,025 + 45% for amounts over $180,000

Source: Treasury

Disclaimer: The contents of this article are for the purposes of providing general information only. Persons should seek appropriate advice from a tax adviser, accountant or financial adviser before undertaking any investments or strategies with respect to their tax or superannuation interests.