House of Representatives

Explanatory Memorandum

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

General outline and financial impact

Reducing personal income tax

Schedule 1 to this Bill amends the Income Tax Rates Act 1986 to reduce the lowest marginal tax rate from 17 per cent to 15 per cent and to increase the top two personal income tax thresholds.

Schedule 1 to this Bill also amends the Medicare Levy Act 1986 to increase 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).

Date of effect: The proposed amendments apply to assessments for the 2005-06 year of income and later years.

Proposal announced: The measure was announced on 10 May 2005 in the 2005-06 Budget.

Financial impact: This measure will cost:

Compliance cost impact: Nil.

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 Rates Act 1986 to reduce the lowest marginal tax rate from 17 per cent to 15 per cent and provide for increases in personal income tax thresholds for the 42 and 47 per cent tax brackets

•

the Medicare Levy Act 1986 to provide 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.

Context of amendments

1.2 The amendments will give effect to the personal income tax cuts announced by the Government on 10 May 2005 in the 2005-06 Budget.

1.3 These tax cuts will mean that more than 80 per cent of taxpayers will be in or below the 30 per cent tax bracket over the forward estimates period. They will increase the rewards from workforce participation for all Australian taxpayers and improve the competitiveness of our personal income tax system in comparison with other developed nations.

Summary of new law

1.4 The amendments to the Income Tax Rates Act 1986 will reduce the lowest marginal tax rate and increase the thresholds at which the top two 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 the senior Australians tax offset.

Comparison of key features of new law and current law

1.6 The personal income tax thresholds will be increased as follows. For assessments for the 2005-06 year of income:

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the 17 per cent marginal tax rate will be cut to 15 per cent

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the 42 per cent threshold will increase to $63,001

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the 47 per cent threshold will increase to $95,001.

1.7 For assessments for the 2006-07 year of income and later years:

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the 42 per cent threshold will increase again to $70,001

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the 47 per cent threshold will increase to $125,001.

1.8 The Medicare levy threshold that applies to taxpayers who are eligible for the senior Australians tax offset will be increased from $20,500 to $21,968 for singles.

Detailed explanation of new law

Resident taxpayers

1.9 Item 1 of Schedule 1 replaces the table in Clause 1 of Part I of Schedule 7 to the Income Tax Rates Act 1986, which sets out the rates of tax on the taxable income of a resident taxpayer.

1.10 Table 1.1 sets out the current thresholds for resident taxpayers and the proposed tax thresholds that will apply to assessments for the 2005-06 year of income, and for the 2006-07 year of income and later years.

Non-resident taxpayers

1.11 The new income tax thresholds will also apply to non-resident taxpayers.

1.12 Item 2 of Schedule 1 replaces the table in Clause 1 of Part II of Schedule 7 to the Income Tax Rates Act 1986, which sets out the rates of tax on the taxable income of a non-resident taxpayer.

1.13 Table 1.2 sets out the current thresholds for non-resident taxpayers and the proposed tax thresholds that will apply to assessments for the 2005-06 year of income, and for the 2006-07 year of income and later years.

Increase in the Medicare levy threshold for senior Australians

1.14 As a result of the reduction of the 17 per cent marginal tax rate to 15 per cent and the impact of the low income tax offset (a maximum offset of $235), the income level up to which senior Australians will receive the senior Australians tax offset will increase. This will mean that eligible senior Australians will have no tax liability until $21,968 for singles.

1.15 The Medicare levy threshold for single seniors will be increased accordingly from $20,500 to $21,968 to ensure that they do not pay the Medicare levy until they are liable for income tax.

1.16 Senior couples for whom the $21,968 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 senior 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.

1.17 The phase in limit where a single senior (eligible for the senior Australians tax offset) does not pay the full Medicare levy rate has been raised to $23,749.

Application provisions

1.18 Clause 4 of this Bill provides for the changes to personal income tax rates and thresholds and the Medicare levy threshold for senior Australians to apply to assessments for the 2005-06 year of income and later years.