House of Representatives

Explanatory Memorandum

(Circulated by 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 increase the threshold where the 30 per cent marginal tax rate begins to apply (from 1 July 2007) and increases the thresholds for the top two marginal tax rates (from 1 July 2008).

This Bill also amends the Income Tax Assessment Act 1936 to increase the maximum amount of low income tax offset and to raise the threshold at which the offset begins to phase out.

In addition, this Bill 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 amendment to the 30 per cent marginal tax rate threshold applies for the 2007-08 income year, with the changes to the 40 per cent and 45 per cent marginal tax rate thresholds applying from the 2008-09 income year.

Proposal announced : This measure was announced on 8 May 2007 in the 2007-08 Budget and in the Treasurer's Press Release No. 034 of 8 May 2007.

Financial impact : This measure will have these revenue implications:

Compliance cost impact : Nil.

Chapter 1 - Reducing personal income tax

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Rates Act 1986 to increase the threshold where the 30 per cent marginal tax rate begins to apply and increases the thresholds for the top two marginal tax rates (from 1 July 2008).

1.2 This Bill also amends the Income Tax Assessment Act 1936 to increase the low income tax offset and the threshold from which it begins to phase out.

1.3 In addition, this Bill amends 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

1.4 These amendments will give effect to the personal income tax cuts announced by the Government on 8 May 2007 in the 2007-08 Budget.

1.5 The 2007-08 Budget tax cuts ensure that more than 80 per cent of taxpayers face a marginal tax rate of 30 per cent or less. The tax cuts will also increase disposable incomes for all Australian taxpayers and provide further incentives for individuals, including part-time workers, to participate in the workforce.

Summary of new law

1.6 The amendments to the Income Tax Rates Act 1986 will raise the 30 per cent threshold from $25,001 to $30,001 (for the 2007-08 income year and later income years), and increase the thresholds to which the top two marginal tax rates begin to apply (for the 2008-09 income year and later income years) to $80,001 and $180,001 for resident and non-resident taxpayers.

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

1.8 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

1.9 This Bill involves phased-in increases to the personal income tax thresholds for the 2007-08 and 2008-09 years of income.

1.10 From 1 July 2007:

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the 30 per cent threshold will apply to income that exceeds $30,000 but does not exceed $75,000; and

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the low income tax offset will be increased from $600 to $750 per year. The low income tax offset will begin to phase out from $30,000 (up from $25,000).

1.11 From 1 July 2008:

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the 40 per cent threshold will apply to income that exceeds $80,000 but does not exceed $180,000; and

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the 45 per cent threshold will apply to income that exceeds $180,000.

1.12 For assessments for the 2007-08 year of income and later years of income, the Medicare levy threshold for single taxpayers who are eligible for the senior Australians tax offset will increase from $24,867 to $25,867, with the phase-in limit increasing from $29,255 to $30,431.

Detailed explanation of new law

Resident taxpayers

1.13 Item 4 replaces the thresholds 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.

1.14 Items 12 and 13 replace the thresholds in clause 1 of Part 1 of Schedule 7 to the Income Rates Act 1986, to apply from 1 July 2008.

1.15 Table 1.1 sets out the current thresholds for resident taxpayers and the new tax thresholds that will apply to assessments for the 2007-08 year of income, and for the 2008-09 year of income and later years. [ Schedule 1, items 4, 12 and 13 ]

Non-resident taxpayers

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

1.17 Item 5 replaces the threshold 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.

1.18 Items 14 and 15 replace the thresholds in clause 1 of Part 2 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.

1.19 Table 1.2 sets out the current thresholds for non-resident taxpayers and the new tax thresholds that will apply to assessments for the 2007-08 year of income, and for the 2008-09 year of income and later years. [ Schedule 1, items 5, 14 and 15 ]

Increase in the low income tax offset

1.20 From 1 July 2007 a taxpayer will be entitled to a low income tax offset where their taxable income is less than $48,750 [ Schedule 1, item 1 ]. The low income tax offset will increase from $600 to $750 per year [ Schedule 1, item 2 ]. In addition, the income threshold from which the tax offset begins to phase out will increase from $25,000 to $30,000 [ Schedule 1, item 3 ].

Increase in the Medicare levy threshold for senior Australians

1.21 As a result of the increase in the low income tax offset (from $600 to $750), the income level up to which senior Australians begin to pay tax will increase. This will mean that eligible senior Australians will have no tax liability until their income reaches $25,867 for singles.

1.22 The Medicare levy threshold for single seniors will be increased accordingly from $24,867 to $25,867 to ensure that they do not pay the Medicare levy until they are liable for income tax. [ Schedule 1, item 9 ]

1.23 Senior couples for whom the $25,867 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. From 1 July 2007 the new senior family threshold will be $37,950 and will ensure that senior couples do not incur a Medicare levy until they incur an income tax liability. [ Schedule 1, item 10 ]

1.24 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 $30,431. Consequential amendments are required to Schedules 8 and 10 of the Income Tax Rates Act 1986 to reflect the increase in the threshold from $25,000 to $30,000. [ Schedule 1, items 5, 6, 8 ]

Application provisions

1.25 Item 11 provides for the changes to personal income tax thresholds and the Medicare levy threshold for senior Australians to apply to assessments for the 2007-08 year of income and later years.

1.26 Item 16 provides for the changes to personal income tax thresholds to apply for assessments for the 2008-09 year of income and later year.