House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Income tax relief

This Bill amends the Income Tax Rates Act 1986 (ITRA 1986) to increase the third personal income tax threshold applying to personal income taxpayers. Taxpayers earning above $80,000 will now face a lower rate of tax from $80,001 to $87,000.

This change will help to achieve a better tax system that supports Australians to work, save and invest.

Date of effect: This measure applies to the 2016-17 income year and later years.

Proposal announced: This measure was announced in the 2016-17 Budget.

Financial impact: This measure was announced in the 2016-17 Budget with the following revenue impact ($ millions):

The Australian Taxation Office (ATO) will issue new income tax withholding schedules once the Commissioner of Taxation (Commissioner) is confident that Parliament will pass these amendments. However, as these new withholding schedules will not apply until after the 2016-17 income year has started, some of the revenue impacts for the 2016-17 income year will be deferred until 2017-18 when taxpayer assessments are finalised and any overpaid income tax is refunded. That said, this deferral will not affect the total cost of the measure over the forward estimates.

Human rights implications: This Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.1 to 2.4.

Compliance cost impact: This measure will have no effect on compliance costs because it is a modification of the currently applicable tax schedule.

Chapter 1 Income tax relief

Outline of chapter

1.1 This Bill amends the ITRA 1986 to increase the third personal income tax threshold applying to personal income taxpayers.

1.2 Resident taxpayers earning above $80,000 will now face a lower rate of tax from $80,001 to $87,000.

1.3 The non-resident tax schedule will also be amended as a result of this Bill to increase the first income tax bracket to $87,000.

1.4 This change will contribute to achieve a better tax system that supports Australians to work, save and invest.

Context of amendments

1.5 An individual's liability to pay income tax in Australia is calculated with reference to a rate tax payable on taxable income. As Australia has a progressive income tax system, the rate of tax payable increases in accordance with the amount of an individual's taxable income as the individual moves from one threshold to another.

1.6 To illustrate, for individuals with taxable income of $100,000, the rates of tax provide that the individual will pay $0 tax on taxable income up to $18,200 because the tax-free threshold is currently $18,200.

1.7 After the tax-free threshold a rate of tax of 19 per cent is payable on taxable income within the threshold of $18,201 and $37,000.

1.8 The next threshold provides that a rate of tax of 32.5 per cent applies to taxable income from $37,001 to $80,000.

1.9 A rate of tax of 37 per cent applies to taxable income in the threshold from $80,001 to $180,000 and if an individual has taxable income over $180,000 the rate of tax payable on that income is 45 per cent.

Summary of new law

1.10 This Bill amends the thresholds so that the rate of tax payable on taxable incomes from $80,001 to $87,000 for individuals is 32.5 per cent.

1.11 This means that individuals with taxable incomes from $80,001 and up to $87,000 will now be subject to the lower rate of tax of 32.5 per cent rather than the rate of tax of 37 per cent which currently applies to taxable income over $80,000.

1.12 This will provide a maximum tax cut of $315 per annum on incomes of $87,000 and above.

1.13 These changes will benefit around 3.1 million taxpayers in 2016-17.

1.14 New withholding schedules will be issued by the Commissioner to take account of these amendments once he is confident Parliament will pass these amendments.

Comparison of key features of new law and current law

Detailed explanation of new law

1.15 This Bill increases the thresholds applying to resident and non-resident taxpayers effectively reducing their income tax burden.

1.16 Part 1 of Schedule 7 to the ITRA 1986 provides that different rates of tax are payable on the taxable income of resident taxpayers according to the amount of taxable income an individual has.

1.17 As a result of the amendments made by this Bill, taxpayers will now have a reduced tax burden as the rate of tax payable on taxable income has decreased from 37 per cent to 32.5 per cent for taxable income from $80,001 to $87,000. [Schedule 1, items 1 and 2]

1.18 The remaining thresholds are unchanged and for taxable income above $87,000 the rate of tax payable is 37 per cent up to $180,000 after which the next threshold commences. Once an individual has taxable income over $180,000 the rate of tax payable is 45 per cent.

1.19 Part 2 of Schedule 7 of the ITRA 1986 establishes the rates of tax payable on the taxable income of non-resident taxpayers.

1.20 The primary difference between Part 1, described above, and Part 2 is that non-resident taxpayers currently pay tax on their taxable income at the rate of tax of 32.5 per cent from $1 up to $80,000.

1.21 Under the new law, non-resident taxpayers will now pay a rate of tax of 32.5 per cent on taxable income from $1 up to $87,000. [Schedule 1, items 3 and 4]

Application and transitional provisions

1.22 This Bill applies to the 2016-17 income year and later years. [Schedule 1, item 5]

1.23 However, as noted in paragraph 1.14, the ATO will need to issue new withholding schedules giving effect to these tax cuts once the Commissioner is confident that Parliament will pass these amendments.

1.24 To give employers and software developers a reasonable time to implement these changes, the Commissioner envisages that these new withholding schedules will take effect one month after their release.

Chapter 2 Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

TREASURY LAWS AMENDMENT (INCOME TAX RELIEF) BILL 2016

2.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.2 The Bill amends the thresholds applying to personal income taxpayers, so that individuals with taxable income up to $87,000 will now be subject to the lower rate of tax of 32.5 per cent rather than the rate of tax of 37 per cent which currently applies to taxable income over $80,000.

Human rights implications

2.3 This Bill does not engage any of the applicable rights or freedoms.

Conclusion

2.4 This Bill is compatible with human rights as it does not raise any human rights issues.

Index

Schedule 1: Amendments