Taxation update: Personal Income Tax Plan

As part of the Government’s aim at supporting economic recovery and creating jobs, some of the proposed measures announced in the recent 2020-21 Federal Budget, centred on changes to individual taxation.

These changes involved several amendments to the previously legislated Personal Income Tax Plan. Importantly, a Bill* including these changes recently passed through parliament and became law.

*Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020. Royal assent on 14 October 2020.

 

Below is an overview of these changes and what they may mean for you moving forward.

 

Individual taxation

Bringing forward the second stage of the Personal Income Tax Plan

Stage 2 of the Personal Income Tax Plan has been brought forward from 1 July 2022 to 1 July 2020 (backdated):

1. The upper threshold of the 19% personal income tax bracket has increased from $37,000 to $45,000.

2. The upper threshold of the 32.5% personal income tax bracket has increased from $90,000 to $120,000.

Please see the below table for further information regarding these changes.

 
Individual resident tax rates
Financial Year Taxable income Marginal tax rate* Tax payable
2020-21 (old) $0 – $18,200 Nil Nil
$18,201 – $37,000 19% Nil + 19% on each $1 over $18,200
$37,001 – $90,000 32.5% $3,572 + 32.5% on each $1 over $37,000
$90,001 – $180,000 37% $20,797 + 37% on each $1 over $90,000
$180,001 + 45% $54,097 + 45% on each $1 over $180,000
       
2020-21 (new) $0 – $18,200 Nil Nil
$18,201 – $45,000 19% Nil + 19% on each $1 over $18,200
$45,001 – $120,000 32.5% $5,092 + 32.5% on each $1 over $45,000
$120,001 – $180,000 37% $29,467 + 37% on each $1 over $120,000
$180,001 + 45% $51,667 + 45% on each $1 over $180,000

*The 2% Medicare Levy may be in addition to this rate.

3. The low-income tax offset (LITO) has increased from $445 to $700 (and decreases at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000, and decreases at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667).

Please see the below table for further information regarding these changes.

 
Low-income tax offset (LITO)
Financial Year Offset Shaded out threshold Cut out threshold
2020-21 (old) $445 $37,000* $66,667
       
2020-21 (new) $700 $37,500^ $66,667

*The offset reduces by 1.5 cents per $1 of taxable income over $37,000.

^The offset reduces by 5 cents per $1 of taxable income between $37,500 and $45,000 and a further 1.5 cents per $1 of taxable income between $45,000 and $66,667.

Please note: Stage 3 of the Personal Income Tax Plan remains unchanged and commences in the 2024-25 financial year, as previously legislated. Namely, from 1 July 2024, the following will occur:

4. The 32.5% marginal tax rate will reduce to 30%, and the 37% marginal tax rate will cease.

5. The upper threshold of the 30% personal income tax bracket will extend to income from $45,000 up to $200,000.

6. The lower threshold of the 45% personal income tax bracket will increase from $180,000 to $200,000.

Please see the below table regarding these changes.

 
Individual resident tax rates
Financial Year Taxable income Marginal tax rate* Tax payable
2020-21 $0 – $18,200 Nil Nil
$18,201 – $45,000 19% Nil + 19% on each $1 over $18,200
$45,001 – $120,000 32.5% $5,092 + 32.5% on each $1 over $45,000
$120,001 – $180,000 37% $29,467 + 37% on each $1 over $120,000
$180,001 + 45% $51,667 + 45% on each $1 over $180,000
       
2024-25 $0 – $18,200 Nil Nil
$18,201 – $45,000 19% Nil + 19% on each $1 over $18,200
$45,001 – $200,000 30% $5,092 + 30% on each $1 over $45,000
$200,001 + 45% $51,592 + 45% on each $1 over $200,000

*The 2% Medicare Levy may be in addition to this rate.

 

Retaining the low and middle-income tax offset for the 2020-21 financial year

The low and middle-income tax offset (LMITO) will apply for the 2020-21 financial year only. For context, the LMITO was due to end as marginal tax rates decreased.

Please see the below table for further information on LMITO.

 
Low and middle-income tax offset (LMITO)
Financial Year Taxable income Offset
2020-21 $0 – $37,000 $255
$37,001 – $48,000 $255 plus 7.5 cents per $1 over $37,000
$48,001 – $90,000 $1,080
$90,001 – $126,000 $1,080 less 3 cents $1 over $90,000

 

Examples of the effect of the above changes on individual taxation for the 2020-21 financial year

The retention of LMITO for one year beyond the commencement of accelerated Stage 2 marginal tax rate cuts, could be quite noticeable for many of us in terms of how we are taxed in the 2020-21 financial year—from a payslip* and tax return perspective.

*Please note: The ATO has given employers until 16 November 2020 to update their payroll systems.

Please see the below table for several simplistic examples of the potential effect of these changes.

 
Examples: Individual resident*
Financial Year Taxable income Net tax payable^ Net income (pa) Net income (pw)
2020-21 (old)# $40,000 $4,467 $35,533 $683.33
$80,000 $18,067 $61,933 $1,191.02
$120,000 $34,117 $85,883 $1,651.60
$160,000 $49,897 $110,103 $2,117.37
$200,000 $67,097 $132,903 $2,555.83
$240,000 $85,897 $154,103 $2,963.52
         
2020-21 (new) $40,000 $3,887 $36,113 $694.48
$80,000 $16,987 $63,013 $1,211.79
$120,000 $31,687 $88,313 $1,698.33
$160,000 $47,467 $112,533 $2,164.10
$200,000 $64,667 $135,333 $2,602.56
$240,000 $83,467 $156,533 $3,010.25

*Single, no dependants, and no HELP debt.

^Gross tax on taxable income plus Medicare Levy, less any applicable offsets (LITO and LMITO). Not eligible for SAPTO.

#These calculations don’t include changes to the 2020-21 Medicare Levy thresholds as they were implemented prior to the 2020-21 Federal Budget.

 

Moving forward

As you can see, there have been several changes to individual taxation for the 2020-21 financial year. Therefore, it’s important to understand how these changes may affect you.

If you subsequently find yourself in receipt of more after-tax income than previously received, take the time to consider how this may be put to use for your own benefit, both now and in the future.

Given this information, you may find our income tax calculator of interest, as well as the following:

If you have any questions regarding this article, please contact us.