Personal income tax cuts
The anticipated personal income tax cuts will be delivered as part of a seven year plan culminating in the removal of one tax bracket from 1 July 2024. The Government states that the end result will be that around 94% of taxpayers will be subject to a marginal tax rate of 32.5%.
The focus right now however is the low and middle tax income brackets with changes to the tax brackets and the introduction of the Low and Middle Income Tax Offset.
|Tax rate||Current||From 1 July 2018||From 1 July 2022||From 1 July 2024|
|0%||$0 – $18,200||$0 – $18,200||$0 – $18,200||$0 – $18,200|
|19%||$18,201 – $37,000||$18,201 – $37,000||$18,201 – $41,000||$18,201 – $41,000|
|32.5%||$37,001 – $87,000||$37,001 – $90,000||$41,001 – $120,000||$41,001 – $200,000|
|37%||$87,001 – $180,000||$90,001 – $180,000||$120,001 – $180,000||–|
|Low and middle income tax offset||Up to $530||–||–|
|LITO||Up to $445||Up to $445||Up to $645||Up to $645|
From 1 July 2018:
- The top threshold of the 32.5% personal income tax bracket will increase from $87,000 to $90,000.
From 1 July 2022:
- The top threshold of the 19% personal income tax bracket will increase from $37,000 to $41,000.
- The top threshold of the 32.5% personal income tax bracket will again increase from $90,000 to $120,000.
- The Low Income Tax offset will increase from $445 to $645. The increased Low Income Tax Offset will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.
From 1 July 2024:
- The 37% tax bracket will be removed.
- The top threshold of the 32.5% personal income tax bracket will again increase from $120,000 to $200,000.
Low and middle income tax offset
|Date of effect||From 2018-19 until 2021-22 income years|
How to give low and middle income earners a tax break without directly benefiting those on larger incomes? The Government’s solution to this conundrum is the introduction of the Low and Middle Income Tax Offset (LIMITO) from the 2018-19 income year.
Applied as a non-refundable tax offset after an individual lodges their income tax return, the tax offset provides:
|Table income||Low and Middle Income Tax Offset (LIMITO)|
|$0 – $37,000||Up to $200|
|$37,000 – $48,000||Offset increase of 3 cents per dollar up to $530|
|$48,000 – $90,000||Up to $530|
|$90,001 to $125,333||Offset phases out at a rate of 1.5 cents per dollar|
Assuming the amending legislation passes Parliament, the offset is intended to be available for the 2018-19 to 2021-22 income years.
The Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset.
If you are trying to work out what these changes mean to you, the Government has added a tax relief estimator on the front page of the budget website. For example, someone on an annual taxable income of $65,000, would receive an annual benefit of around $530 in the first few years and a total benefit of $3,740.
- Lower, fairer and simpler taxes fact sheet
- Treasurer – Tax relief for working Australians, low and middle income earners first
Changes to testamentary trusts
|Date of effect||1 July 2019|
The concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from the deceased estate or the proceeds of the disposal or investment of those assets.
Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors. The Government is concerned that some taxpayers are inappropriately obtaining the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into the testamentary trust.
While the rules already contain some integrity provisions that are aimed at limiting the scope for inappropriately boosting the income earning capacity of testamentary trusts, the measure clarifies that minors will be taxed at adult marginal tax rates only in respect of the income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).
Crackdown on family trust ’round robin’ arrangements
|Date of effect||1 July 2019|
Family trusts will be subject to a specific anti-avoidance rule that applies to other closely held trusts that engage in circular trust distributions.
Currently, where family trusts act as beneficiaries of each other in a ‘round robin’ arrangement, a distribution can be ultimately returned to the original trustee – in a way that avoids any tax being paid on that amount.
The measure would enable the ATO to impose tax on these distributions at a rate equal to the top personal tax rate plus the Medicare levy.
Taxing the fame or image of high profile sportspeople and actors
|Date of effect||1 July 2019|
From 1 July 2019, high profile individuals will no longer able to take advantage of lower tax rates by licencing their fame or image to another entity.
Currently, high profile individuals can licence their fame or image to another entity such as a related company or trust. Income for the use of their fame or image goes to the entity that holds the licence – creating the opportunity to manipulate different tax treatments. For example, if the rights are held by a discretionary trust the income generated from the use of these rights can be distributed to other family members and can potentially be taxed at lower rates than if the income was taxed in the hands of the individual.
This measure ensures that all remuneration (including payments and non-cash benefits) provided for the commercial exploitation of a person’s fame or image are included in the assessable income of that individual.
The ATO had previously released some draft guidelines (refer to PCG 2017/D11) in this area, possibly seeking to set some practical boundaries around the ability to split this type of income with others. Assuming the changes are legislated then these guidelines would appear to be redundant from 1 July 2019.
Medicare levy low income threshold increase
|Date of effect||2017-18 income years|
The Medicare levy low income thresholds for singles, families, seniors and pensioners will increase from the 2017-18 income years.
|Single seniors and pensioners||$34,244||$34,758|
|Family threshold for seniors and pensioners||$47,670||$48,385|
|Each dependent child or student (increase to family threshold)||$3,356||$3,406|
Encouraging pensioner financial independence
|Date of effect||From 2017-18|
A range of measures seek to encourage pensioner financial independence:
- Pension Work Bonus increase from $250 to $300 per fortnight– allowing pensioners to earn up to $7,800 each year without impacting their pension. This is in addition to the income free area, which is currently $168 a fortnight for a single pensioner and $300 a fortnight (combined) for a pensioner couple. A single person with no other income will be able to earn up to $468 a fortnight from work and get the maximum rate of Age Pension.
- Pensioners will also continue to accrue unused amounts of the fortnightly Work Bonus, which can exempt future earnings from the pension income test. The maximum accrual amount will increase to $7,800.
- The pension work bonus will also be expanded to allow self-employed retireesto earn up to $300 per fortnight without impacting their pension.
Example from the pension work bonus fact sheet
Nisha is a single part rate age pensioner who runs a small business. She earns an average of $1,000 a fortnight. Her assets are below the pension asset test free area. As Nisha’s income from self-employment is now eligible for the Work Bonus, the first $300 of her income will be excluded from the pension income test, and Nisha will receive a higher part-rate Age Pension. Her pension will increase by $150 per fortnight.
- Amendments to the pension means test rules– new Age Pension means testing rules will be introduced for pooled lifetime income streams. The rules will assess a fixed 60% of all pooled lifetime product payments as income, and 60% of the purchase price of the product as assets until 84, or a minimum of 5 years, and then 30% for the rest of the person’s life.
- Expansion of the pension loan scheme– the scheme, enabling Australians to use the equity in their homes to increase their incomes, will be extended to everyone over Age Pension age. The maximum fortnightly income stream will increase to 150% of the Age Pension rate.
- Preparing financially for a longer and more secure life fact sheet
- Treasurer – Guaranteeing the essential services Australians rely on