Budget Review 2021–22 Index

Phillip Hawkins

In the 2021–22 Budget the Government announced that it would retain the Low and Middle Income Tax Offset (LMITO) for the 2021–22 year (Budget Measures: Budget Paper No. 2: 2021–22, p. 27). Prior to this announcement, the LMITO would have ended after the 2020–21 financial year, resulting in some low and middle income earners facing a higher tax liability in 2021–22 than in 2020–21.

This measure will require legislation.

Personal income tax plan

This announcement in the Budget follows several years of personal income tax changes and prospective changes under the Personal Income Tax Plan (PITP). The PITP was first announced in the 2018–19 Budget and comprises three stages:

• Stage one commenced in the 2018–19 income year. It primarily targeted low and middle income tax earners, through the introduction of the LMITO and an increase in the threshold above which the 37% marginal tax rate applies, from $87,000 to $90,000.
• Stage two was initially proposed to start from 1 July 2022 but was brought forward to 1 July 2020. It delivered additional tax cuts to higher income earners through changes to tax rates and thresholds and would have ‘locked–in’ tax reductions for lower income earners after the LMITO was removed. By retaining the LMITO for an additional two years, however, lower income earners receive an additional tax reduction in in 2020–21 and 2021–22. The existing low income tax offset (LITO) was also permanently increased for those on taxable incomes of less than $45,000.
• Stage three is scheduled to apply from the 2024–25 income year. It will provide further tax cuts by abolishing the 37% marginal tax rate entirely and lowering the 32.5% marginal tax rate to 30%, so that the marginal tax rate on taxable income between $45,000 and $200,000 will be 30%. The maximum tax cut available under stage 3 of the PITP (for those earning $200,000 and over), is $11,640 relative to 2017–18 tax levels.

Table 1 shows the estimated reduction in tax for individuals at each stage of the PITP, including the retention of LMITO (for the two additional two years). This is measured cumulatively compared to the 2017–18 income year (before the PITP commenced). The table illustrates the higher taxes applied to low and middle income earners in future years (unless LMITO is further extended).

Table 1: estimated tax reductions at each stage of the Personal Income Tax Plan (PITP), relative to 2017–18

Source: Parliamentary Library analysis of the Personal Income Tax Plan.

Figures 1 and 2 provide an illustration of the impact of each stage of the PITP at two selected taxable income levels. The impact of the LMITO is separately identified to show the temporary additional tax reduction in 2020–21 and 2021–22. For purposes of comparison, the scale of the charts is kept consistent.

Figure 1: tax reductions relative to 2017–18 income year for taxable income of $50,000

Source: Parliamentary Library analysis of the Personal Income Tax Plan.

Figure 1 shows the dollar value of personal income tax cuts in each year for an individual with $50,000 per annum in taxable income. This highlights that the initial tax cuts under the PITP for this level of income were provided entirely by the LMITO. Stage two tax changes were intended to provide an equivalent tax reduction once LMITO was removed. However, as LMITO will be retained for 2020–21 and 2021–22 an additional tax cut is provided in those years but is removed for subsequent years. A small additional tax cut is provided to an individual with this level of taxable income in stage 3 of the PITP.

Figure 2: tax reductions relative to 2017–18 income year for taxable income of $120,000

Source: Parliamentary Library analysis of the Personal Income Tax Plan.

Figure 2 shows the dollar value of personal income tax cuts in each year for an individual with $120,000 per annum in taxable income. The LMITO phases out entirely at a taxable income of $126,000, so the amount of LMITO received at this level of income is much smaller.

Figure 2 also illustrates that the initial tax cuts under stage one of the PITP, were targeted at lower income earners and that subsequent stages of the PITP provide larger tax reductions for higher income earners.