Individuals are the big winners in an otherwise lacklustre Federal Budget, with the highlight being tax cuts for low to middle income earners.

From July 1 2018, Those earning up to $90,000 per annum are to pay between $200 and $530 per year less tax. These amounts would be provided as an offset against the income tax assessment, on lodgement of an individual tax return.

The tax cut plan will take 7 years to roll out and will be pushed out in 3 stages.  Designed initially to provide relief to bracket creep, and eventually removing the 37% personal income tax bracket altogether.   On completion, this would bring 94% of Australian Taxpayers to an income tax rate of 32.5%.  Here are the specifics:

Low Income Tax Offset (LITO)

  • From 1 July 2018, the Low and Middle Income Tax Offset will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or under.
  • Those earning between $37,000 and $48,000, will receive an offset at an increased rate of 3 cents per dollar up 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.
  • Taxpayers earning $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar.
  • The benefit of the Low and Middle Income Tax Offset is in addition to the existing Low Income Tax Offset.
  • In 2022-23 the Low Income Tax Offset (LITO) will increase from $445 to $645 and the increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.

Tax Threshold Changes

  • From 1 July 2018, the top threshold of the 32.5% tax bracket will increase from $87,000 to $90,000.
  • From 1 July 2022, The top threshold of the 32.5% bracket will increase from $90,000 to $120,000.
  • In 2022-23, the top threshold of the 19% bracket will increase from $37,000 to $41,000
  • from 1 July 2024, the top threshold of the 32.5% bracket will increase from $120,000 to $200,000, removing the 37% tax bracket completely. Taxpayers will pay the top marginal tax rate of 45% from taxable incomes over $200,000 and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.

Table - Current and Future Income Tax Rates

Medicare

The Medicare levy’s low-income threshold will be increased from the 2017/18 income year. The threshold for singles will increase to $21,980 (up from $21,655 in 2016/17). The family threshold will increase to $37,089 (up from $36,541 in 2016/17). For single seniors and pensioners, the threshold will increase to $34,758 (up from $34,244 in 2016/17). The family threshold for seniors and pensioners will increase to $48,385 (up from $47,670 in 2016/17). For each dependent child or student, the family income thresholds increase by a further $3,406 (up from $3,356 in 2016/17).

There will be no increase to the Medicare Levy for taxpayers, remaining at 2%.

Payments to Veterans and their Spouses

From 1 May 2018 any supplementary payments such as pension supplements, rent assistance and remote area allowances paid to a veteran, and any full payments made to the spouse or partner of a veteran who dies, are exempt from income tax.

ATO Funding Boost to Target False Claims by Individuals

Despite the publicity surrounding the high level of work-related expenses claims, and the ATO's strong focus on this area, the Budget did not announce any additional measures other than an increase in funding for non-compliance auditing.

Compliance auditing is also receiving a financial windfall with the ATO receiving over $130 million to target individuals for non compliance.  Their focus will be on excessive work related deductions, foreign sourced income, and high net worth individuals.  Claims for work-related car expenses will be targeted in 2018 tax returns, looking at deliberate lodging of false claims in relation to work-related car expenses, such as claiming things like home to work travel or other private trips; making claims for trips they didn't actually undertake; or claiming expenses their employer has already paid for or reimbursed.

High Profile Individuals Image Rights

High profile individuals (such as sportspeople and actors) will no longer be able to license their fame or image and funnel this income through related entities to lower any tax payable.  From 1 July 2019, impacted individuals will be personally assessable on any income derived as a result of their fame or image.

Minors and testamentary trusts: Concessional tax rates limit

The concessional tax rates available for minors receiving income from testamentary trusts, will be limited to income derived from assets that are transferred from deceased estates or the proceeds of the investment or disposal of those assets. Currently, income received by minors from testamentary trusts is taxed at normal adult rates rather than the higher tax rates that generally apply to minors.

The Government is concerned that some taxpayers are able to inappropriately obtain the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into testamentary trusts. This measure will clarify that minors will be taxed at adult marginal tax rates only in relation to income of a testamentary trust that is generated from assets of a deceased estate (or the proceed of the disposal or investment of these assets).

Aligning eligibility of student payments with HELP

The Government will align the eligibility of student payments for higher education courses with eligibility for the Higher Education Loan Program (HELP) from the 2017-18 income year. The measure will limit the eligibility for student payments to students undertaking courses approved for higher education loans. Payments to existing students will be grandfathered for the duration of their current course.

Measures for older Australians

The Government will introduce a range of measures to enhance the standard of living of older Australians to commence on 1 July 2019:

  • Increase the Pension Work Bonus from $250 to $300 per fortnight (ie $7,800 a year) and extend the Bonus to self employed retirees who will be able to earn up to $300 per fortnight without impacting their pension;
  • Amend the pension means test rules to encourage the development and uptake of lifetime retirement income products that can help retirees manage the risk of outliving their savings
  • Expand the Pension Loans Scheme to everyone over Age Pension age and the maximum fortnightly income stream will be increased to 150% of the Age Pension rate. This will enable Australians to use the equity in their homes to increase their incomes and provide for a more comfortable quality of life.

If you need further clarification on any of the changes, please contact your trusted PJT Advisor.