House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 Reducing personal income tax

Outline of chapter

1.1 Schedule 1 to this bill will amend:

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the Income Tax Assessment Act 1936 to provide for an increase in the low income tax offset and the income threshold at which the tax offset begins to phase out;

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the Income Tax Rates Act 1986 to provide for increases in personal income tax thresholds; and

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the Medicare Levy Act 1986 to provide for an increase in the income threshold that applies to taxpayers who are eligible for a rebate of tax under section 160AAAA of the Income Tax Assessment Act 1936 - the Senior Australians Tax Offset (SATO).

Context of amendments

1.2 The amendments will give effect to the personal income tax cuts announced by the Government in the 2003-2004 Federal Budget on 13 May 2003.

Summary of new law

Summary of the amendments

1.3 The amendments to the Income Tax Assessment Act 1936 will provide for an increase in the low income tax offset and the income threshold at which the low income tax offset begins to phase out.

1.4 The amendments to the Income Tax Rates Act 1986 will increase the thresholds at which marginal income tax rates apply for resident and non-resident taxpayers other than companies, prescribed unit trusts, superannuation funds and certain other trusts.

1.5 The amendments to the Medicare Levy Act 1986 will provide for an increase in the income threshold that applies to taxpayers who are eligible for a rebate of tax under section 160AAAA of the Income Tax Assessment Act 1936 (the SATO).

Date of effect

1.6 The amendments in Schedule 1 will apply to assessments for the 2003-2004 income year and later income years.

Comparison of key features of new law and current law

1.7 The low income tax offset will be increased from $150 to $235 per year. In addition, the income threshold at which the tax offset begins to phase out will be increased from $20,700 to $21,600.

1.8 The personal income tax thresholds will be increased as follows:

1.9 The Medicare levy threshold that applies to taxpayers who are eligible for a rebate of tax under section 160AAAA of the Income Tax Assessment Act 1936 (the SATO) will be increased from $20,000 to $20,500.

Detailed explanation of new law

Increase in the low income tax offset

1.10 The low income tax offset will be increased from $150 to $235 per year. In addition, the income threshold at which the tax offset begins to phase out will be increased from $20,700 to $21,600.

1.11 As a result of these changes, the maximum amount of low income tax offset of $235 per year will be available to taxpayers on incomes of up to $21,600. The income limit up to which the tax offset can be claimed will increase from $24,450 to $27,475.

Increase in personal income tax thresholds

Resident taxpayers

1.12 Item 4 of Schedule 1 replaces the table in clause 1 of Part I of Schedule 7 of the Income Tax Rates Act 1986 , which sets out the rates of tax on the taxable income of a resident taxpayer. The new thresholds will apply to assessments for the 2003-2004 income year and later years.

1.13 The following table sets out the current tax thresholds for resident taxpayers and the proposed tax thresholds that will apply to assessments for the 2003-2004 income year and later income years.

Non-resident taxpayers

1.14 New thresholds will also apply to non-resident taxpayers.

1.15 Item 5 of Schedule 1 replaces the table in clause 1 of Part II of Schedule 7 of the Income Tax Rates Act 1986 , which sets out the rates of tax on the taxable income of a non-resident taxpayer. The new thresholds will apply to assessments for the 2003-2004 income year and later income years.

1.16 The following table sets out the current tax thresholds for non-resident taxpayers and the proposed tax thresholds that will apply to assessments for the 2003-2004 income year and later income years.

Increase in the Medicare levy threshold for senior Australians

1.17 The increase in the low income tax offset means that taxpayers who receive a rebate of tax under section 160AAAA of the Income Tax Assessment Act 1936 , the SATO, will be able to earn up to an additional $500 annual income before they have a tax liability.

1.18 The amount of the SATO, when taken together with the current $150 low income tax offset, is sufficient to offset all income tax on an annual income of $20,000 for single seniors and up to $32,612 for a couple, depending upon the income earned by each member of the couple.

1.19 As a result of the increase in the low income tax offset and the $20,000 income tax threshold, the income level up to which senior Australians will have no tax liability will increase to $20,500 for singles and up to $33,612 for couples, depending upon the income earned by each member of the couple.

1.20 The Medicare levy threshold for single seniors will be increased accordingly from $20,000 to $20,500 to ensure that they do not pay Medicare levy until they are liable for income tax.

1.21 Senior couples for whom the $20,500 Medicare levy threshold is not sufficient to ensure that they incur no Medicare levy liability until they incur an income tax liability - for example because one partner earns significantly more than the other - are able to access a seniors family threshold. The current senior family threshold of $31,729 is already sufficient to ensure that senior couples do not incur a Medicare levy until they incur an income tax liability.

Application provisions

1.22 Clause 4 of this bill provides for the changes to the low income tax offset, personal income tax thresholds and Medicare levy threshold for senior Australians to apply to assessments for the 2003-2004 income year and later income years.

Consequential amendments

1.23 Items 6 and 7 of Schedule 1 make consequential amendments to Schedules 8 and 10 of the Income Tax Rates Act 1986 by omitting '$20,000' (wherever occurring) and substituting '$21,600'.