This article was written by King Tan, Amanda Kazacos and Ed Slattery.
One of the platform measures in the Budget is the announcement of a seven-year Personal Income Tax Plan. The plan has three key steps. The first step will provide permanent tax relief to low and middle income earners. The second step will provide relief from bracket creep by increasing the threshold of the 32.5% personal income tax bracket. The third step will remove the 37% personal income tax bracket. These measures build on similar announcements in the 2016-17 budget measure and seek to provide tax relief to encourage working Australians to remain in the workforce..
Low Income Tax Offset (step 1)
For the income years of 2018-2019 to 2021-2022, the Government will provide a non-refundable tax offset of up to $530 per annum to Australian resident low and middle income taxpayers. It will be received on assessment as a lump sum, after an individual lodges their tax return.
The Low and Middle Income Tax Offset will provide the following benefits, and is in addition to the Low Income Tax Offset:
- for taxpayers with taxable income of $37,000 or less – up to $200 per annum;
- for taxpayers with taxable income between $37,000 and $48,000 – up to $530 per annum (increasing at a rate of three cents per dollar);
- for taxpayers with taxable income between $48,000 and $90,000 – all eligible for the maximum benefit of $530 per annum; and
- for taxpayers with taxable income between $90,001 and $125,333, the offset will phase out at a rate of 1.5 cents per dollar.
Bracket creep (step 2)
From 1 July 2018, the Government will increase the top threshold of the 32.5% personal income tax bracket from $87,000 to $90,000.
From 1 July 2022, the Government will:
- increase the Low Income Tax Offset from $445 to $645;
- extend the 19% personal tax bracket from $37,000 to $41,000 to lock in the benefits of step 1;
- withdraw the increased Low Income Tax Offset at:
- a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000;
- a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667; and
- further increase the top threshold of the 32.5% personal income tax bracket from $90,000 to $120,000.
Simplification (step 3)
In the third step, the Government will simplify and flatten the personal tax system by removing the 37% tax bracket entirely.
From 1 July 2024, the Government will extend the top threshold of the 32.5% personal income tax bracket from $120,000 to $200,000. This means that:
- taxpayers with taxable income exceeding $200,000 will pay the top marginal tax rate of 45%; and
- taxpayers with taxable income between $41,0001 and $200,000 will pay the marginal tax rate of 32.5%.
This measure builds on the 2016-17 Budget measure Ten Year Enterprise Tax Plan — targeted personal income tax relief, which extended the 32.5% personal income tax bracket from $80,000 to $87,000 from 1 July 2016. It also reflects inflation and wage growth impacts.
A range of changes have been announced to the superannuation regime. The key changes include:
Caps and Limits
A 3% annual cap on passive fees charged by superannuation funds on small accounts with balances below $6,000 will be introduced. Exit fees on all superannuation accounts will be banned.
The Government has announced an intention to also strengthen the ATO led consolidation regime by requiring the transfer of all inactive superannuation accounts where the balances are below $6,000 to the ATO. The ATO will expand its data matching processes to proactively reunite these inactive superannuation accounts with the member’s active account, where possible. This measure will also include the proactive payment of funds currently held by the ATO.
These changes will take effect from 1 July 2019.
Changes to insurance
Insurance arrangements for certain cohorts of superannuation members will be changed. Insurance within superannuation will move from being a default framework to being offered on an opt-in basis for:
- members with low balances of less than $6,000;
- members under the age of 25 years; and
- members whose accounts have not received a contribution in 13 months and are inactive.
The changes will take effect on 1 July 2019 and affected superannuants will have a period of 14 months to decide whether they will opt in to their existing cover or allow it to switch off.
Allowable members in self-managed superannuation funds
The Government will increase the maximum number of allowable members in new and existing self-managed superannuation funds and small APRA funds from four to six, from 1 July 2019. This will provide greater flexibility for larger families to implement intergenerational solutions for managing long-term, capital intensive investments.
Preventing inadvertent concessional cap breaches by certain employees
Individuals whose income exceeds $263,157 and have multiple employers will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018. This measure is intended to allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory SG contributions. Breaching the cap otherwise results in these individuals being liable to pay excess contributions tax, as well as a shortfall interest charge. Employees who use this measure could negotiate to receive additional income, which is taxed at marginal tax rates.
Three-yearly audit cycle for some self-managed superannuation funds
The annual audit requirement for self-managed superannuation funds (SMSFs) with a history of good record-keeping and compliance will be changed to a three-yearly requirement. This measure will reduce red tape for SMSF trustees that have a history of three consecutive years of clear audit reports and have lodged the fund’s annual returns in a timely manner. This measure will start on 1 July 2019 and, to ensure smooth implementation, the Government will consult with stakeholders.
Pension Loans Scheme
The Pension Loans Scheme will be expanded to give all Age Pension-aged Australians the option to boost their standard of living. Full rate pensioners will be able to boost their income by up to $11,799 (singles) or $17,800 (couples) per year.
Pensioner Work Bonus
The pension work bonus will be increased to allow age pensioners to earn an extra $50 a fortnight without reducing their pension. For the first time, the bonus will be extended to self-employed individuals who can now earn up to $7,800 a year.
From 1 July 2019, the concessional tax rates for minors receiving income from testamentary trusts will not be available for trust assets unrelated to the deceased estate. This measure will clarify that minors will be taxed at adult marginal tax rates only in respect of income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).
Increasing the Medicare levy low-income threshold
The Medicare levy low-income thresholds for singles, families, and seniors and pensioners will be increased from the 2017-18 income year. The increases take account of recent movements in the CPI so that low-income taxpayers generally continue to be exempted from paying the Medicare levy.
The thresholds will be increased as follows:
- singles – from $21,655 to $21,980;
- family – from $36,541 to $37,089;
- single seniors and pensioners – from $34,244 to $34,758;
- family threshold for seniors and pensioners - from $47,670 to $48,385; and
- for each dependent child or student, the family income thresholds increase by a further $3,406, instead of the previous amount of $3,356.
Retaining the Medicare levy rate at 2%
The Medicare Levy increase of 0.5% as proposed in the 2017-2018 Budget to fund the NDIS will not proceed. The Medicare Levy will accordingly remain at 2.0%. Other consequential changes to related tax rates, such as the fringe benefits tax rate and withholding tax rates, will also not proceed.
For a full analysis of this year's Budget measures, please see Australian Federal Budget 2018-19.