Seven-year Personal Income Tax Plan to be introduced
A seven-year Personal Income Tax (PIT) Plan will be implemented in three steps, to introduce a low and middle income tax offset, to provide relief from bracket creep and to remove the 37 per cent PIT bracket.
This measure builds on the 2016-17 Budget measure that extended the 32.5 per cent PIT bracket from $80,000 to $87,000 from 1 July 2016.
Step 1: Low and middle income tax offset to be introduced
A low and middle income tax offset (LMITO) will be introduced as a non-refundable tax offset of up to $530 pa to resident low and middle income taxpayers from 2018-19 to 2021-22.
The LMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less. For taxable incomes between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530. Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530. For taxpayers with taxable incomes from $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar.
The LMITO will be received as a lump sum on assessment after an individual lodges their tax return. The benefit of the LMITO is in addition to the existing low income tax offset.
Step 2: Relief from bracket creep for middle income taxpayers
Middle income taxpayers will be provided relief for bracket creep in phases.
From 1 July 2018, the top threshold of the 32.5 per cent PIT bracket will be increased from $87,000 to $90,000.
From 1 July 2022, the low income tax offset will be increased from $445 to $645, and the 19 per cent PIT bracket will be increased from $37,000 to $41,000 to lock in the benefits of the LMITO in Step 1. The increased low income tax offset will be withdrawn at a rate of 6.5 cents per dollar for incomes between $37,000 and $41,000, and at a rate of 1.5 cents per dollar for incomes between $41,000 and $66,667.
From 1 July 2022, the top threshold of the 32.5 per cent PIT bracket will be further increased from $90,000 to $120,000.
Step 3: Removing the 37 per cent personal income tax bracket
The 37 per cent PIT bracket will be removed from 1 July 2024.
From 1 July 2024, the top threshold of the 32.5 per cent PIT bracket will be increased from $120,000 to $200,000. Taxpayers will pay the top marginal tax rate of 45 per cent for taxable incomes exceeding $200,000, and the 32.5 per cent PIT bracket will apply to taxable incomes of $41,001 to $200,000.
Source: Budget Paper No 2, pp 33-34; Treasurer's media release “Tax relief for working Australians, low and middle income earners first”, 8 May 2018; and Budget 2018-19 Glossy: Stronger growth to create more jobs, p 11.