The 2020–21
Budget proposes bringing forward stage two of the Government’s Personal
Income Tax Plan (PITP) which was announced in the 2018–19 and 2019–20 Budgets
and implemented by the Treasury Laws
Amendment (Personal Income Tax Plan) Act 2018 (the 2018 Act)
and Treasury
Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Act
2019 (the 2019 Act) respectively.
The personal income tax cuts proposed by the 2020–21 Budget were
passed by Parliament on 9 October 2020 as Schedule 1 of the Treasury
Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020
(the 2020 Bill).
Previous Legislation
The 2018 Act introduced three tranches of tax changes,
which were subsequently amended by the 2019 Act.
Stage one changes in the 2018 and 2019 Acts were primarily
targeted at those on lower taxable incomes by using tax offsets which phased
out for those on higher taxable incomes. The changes in stage one legislated by
the 2018 and 2019 Acts:
- increased the top income tax threshold for the 32.5 per cent
tax rate from $87,000 to $90,000 from 2018–19 and
- introduced the Low and Middle Income Tax Offset (LMITO), which is
a non-refundable tax offset for individuals with taxable incomes of up to
$125,333. The maximum amount of the offset is $1,080 for those with taxable
income between $48,000 and $90,000. Those with taxable income above
$90,000 receive LMITO at a reduced rate, with it fully phasing out for
individuals with taxable income of $125,333 or more.
Stage two, also legislated in the 2018 and 2019 Acts, was to
commence in the 2022–23 income year and would have:
-
increased the maximum rate of the existing Low-Income Tax Offset
(LITO) from $445 to $700 per annum
- increased the top income threshold for the 32.5 per cent
rate from $90,000 to $120,000
- increased the top income threshold for the 19 per cent
marginal rate from $37,000 to $45,000 and
-
removed the LMITO from the 2022–23 income year, at which point
the stage two increases in the LITO and changes to tax thresholds would have
‘locked-in’ the tax reductions for lower income earners provided in stage one,
whilst also providing additional tax cuts for those on higher taxable incomes.
Stage three, commencing in 2024–25, will extend the 32.5 per cent
tax rate up to a taxable income of $200,000, abolishing the 37 per cent
marginal tax rate entirely. The 45 per cent marginal tax rate will be
retained for taxable income in excess of $200,000, as is currently the case for
income in excess of $180,000. Stage three is unaffected by the changes in the
2020 Bill.
Additional information about the previously legislated
changes is available in the Library’s
Bills Digest.
Budget 2020-21 Tax Changes
The 2020–21 Budget brings forward all components of stage
two of the 2018 and 2019 tax changes to the 2020–21 financial year. This stage
was originally intended to come into effect in 2022–23.
In addition to bringing forward stage two, the LMITO is
retained for the 2020–21 income year. This means that for the 2020–21 income year
only, LMITO will apply on top of the stage two reductions (where it would have
formerly ceased at the introduction of stage two in 2022–23).
As indicated in Table 1
below, this means that relative to the 2019–20 year:
-
individuals with taxable income below $90,000 will receive an
additional tax cut in the 2020–21 year from LMITO, but no additional tax cut
once LMITO is removed from 2021–22
- as
outlined above, stage one of the PITP, which has already been legislated,
provided tax cuts to those on lower taxable incomes
-
individuals earning between $90,000 and $126,000 will receive an
additional tax cut from LMITO for the 2020–21 income year, on top of cuts from
the changes to tax thresholds in stage two, which will be retained for
subsequent years and
-
individuals with taxable income over $126,000 do not receive any
benefit from LMITO, but receive tax cuts to tax thresholds in stage two, which
are retained in subsequent years.
Table 1: tax cut relative to 2019–20
| Taxable income ($) |
2020–21 |
2021–22
2022–23
2023–24 |
| 20 000 |
- |
- |
| 30 000 |
255 |
- |
| 40 000 |
580 |
100 |
| 50 000 |
1 080 |
- |
| 60 000 |
1 080 |
- |
| 70 000 |
1 080 |
- |
| 80 000 |
1 080 |
- |
| 90 000 |
1 080 |
- |
| 100 000 |
1 530 |
750 |
| 110 000 |
1 980 |
1 500 |
| 120 000 |
2 430 |
2 250 |
| 130 000 |
2 430 |
2 430 |
| 140 000+ |
2 430 |
2 430 |
Source: Parliamentary Library analysis,
based on the Treasury Laws Amendment (Tax Relief So Working Australians Keep
More Of Their Money) Act 2019 and the Treasury Laws Amendment (A Tax Plan
for The Covid-19 Economic Recovery) Bill 2020.
The 2020–21 Budget does not propose any changes to stage
three. As such, barring any future budgetary measures, the new 2020–21 tax
rates will apply until the new tax thresholds come into effect in 2024–25.
Financial impact
As outlined in Budget
Measures: Budget Paper No. 2: 2020–21, the tax changes are
estimated to cause a substantial reduction in revenue in 2020–21 and 2021–22. As
indicated in Table 2, this is partly offset in 2022–23 and 2023–24 due to timing
impacts associated with LMITO no longer applying for the 2021–22 year, which
affects tax collections in 2022–23 because LMITO is applied at the time that tax
returns are assessed. The estimated net impact of the personal income tax
changes over the four years of the forward estimates period is a reduction
in the underlying cash balance of $17.8 billion.
Table 2: financial impacts of the
Budget Measure: bringing forward the Personal Income Tax Plan and retaining the
low and middle income tax offset
| Financial Year |
2020–21 |
2021–22 |
2022–23 |
2023–24 |
| Receipts ($m)—ATO |
–6 940 |
–16 870 |
5 730 |
250 |
Source:
Australian Government, Budget measures:
budget paper no. 2: 2020–21, p. 18.
Distribution of taxation
Publicly available aggregated data of taxpaying individuals
is available from the Australian
Taxation Office (ATO), relating to the 2017–18 financial year. Although
this information is now somewhat dated, we can use it to obtain an indication
of the distribution of taxpayers across tax brackets. These figures only
include ‘taxable individuals’. As such, they do not include the approximately
3.4 million individuals who submitted tax returns in 2017–18 with ‘net
tax’ of zero (with net tax being the amount of tax owed before
refundable credits are applied).
Table 3 shows the tax rates for recently
legislated tax changes, compared to the tax rates
in place directly before these changes were made, and the number of
individuals, and proportion of taxpayers, within each tax bracket.
Table 3: 2017-18 distribution of taxable income
| Tax rate (%) |
Previous
2019–20 tax rates |
Taxable
individuals |
Proportion
(%) |
New
2020–21 tax rates |
Taxable
individuals |
Proportion
(%) |
|
Nil
19
|
$0-$18,200
$18,201–
$37,000
|
2 390
209 |
22 |
$0–$18,200
$18,201–
$45,000
|
3 693
788 |
34 |
| 32.5 |
$37,001–
$90,000 |
5 975
055 |
55 |
$45,001–
$120,000 |
5 866
515 |
54 |
| 37.0 |
$90,001–
$180,000 |
2 064
151 |
19 |
$120,001–
$180,000 |
869 112 |
8 |
| 45.0 |
$180,001
and over |
434 555 |
4 |
$180,001
and over |
434 555 |
4 |
| |
TOTAL |
10 863
970 |
100 |
TOTAL |
10 863
970 |
100 |
Source: ATO
taxation statistics 2017–18, Individuals,
Individual Table 16A.
Note: Data by percentile
distribution is available from the ATO’s Taxation Statistics 2017–18. Where
these don’t align to the tax brackets, the closest available figures are
provided (that is, $37,000 ($37,131), $45,000 ($45,656), $90,000 ($91,126), $120,000
($120,827), $180,000 ($185,648)).
This indicates that, compared to the previous 2019–20 tax
rates, under the new tax regime:
- approximately 1.3 million individuals with taxable incomes
of between $37,001 and $45,000 will have a lower tax rate on their income
earned over $37,000
- approximately 1.2 million individuals with taxable incomes
of between $90,001 and $120,000 will have a lower tax rate on their income of
between $90,000 and $120,000
- approximately 8.5 million individuals with taxable incomes
greater than $37,001 will benefit from the increase in the threshold of the 19 per cent
income tax bracket and
- approximately 2.5 million individuals with taxable incomes
greater than $90,000 will benefit from the increase in the threshold of the
32.5 per cent income tax bracket.
Whilst these changes indicate a downward shift in the total
number of individuals who fall in each tax bracket, they do not necessarily
indicate that all individuals in a new tax bracket will have a reduced tax
liability compared with other years, as a number of other factors (including
offsets like the LMITO, or changes in deductions) contribute to an individual
taxpayer’s final tax amount.
All online articles accessed October 2020