House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Chapter 1: Tax cuts to help with the cost of living

Outline of chapter

1.1 Schedule 1 to the Cost of Living Tax Cuts Bill amends the income tax law to modify income tax rate thresholds and tax rates for individuals for the 2024-25 and later income years. These amendments deliver tax cuts for all Australian taxpayers.

1.2 Legislative references in this chapter are to the Rates Act unless otherwise specified.

Context of amendments

1.3 An entity's liability to pay income tax in Australia on a taxable income is calculated by reference to various rates and thresholds. As Australia has a progressive income tax system for individuals, higher rates of tax are payable by individuals as their income increases beyond particular thresholds.

1.4 Section 12 of the Rates Act provides that individuals and other entities not dealt with elsewhere in the Act must generally pay income tax at the rates set out in Schedule 7 to that Act.

1.5 Prior to the amendments, for the 2024-25 income year, Part I of Schedule 7 provides that Australian resident taxpayers are generally:

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not subject to tax on the part of their ordinary taxable income that does not exceed $18,200 (the tax-free threshold);

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subject to tax at a rate of 19 per cent on the part of their taxable income that exceeds $18,200 but does not exceed $45,000;

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subject to tax at a rate of 30 per cent on the part of their taxable income that exceeds $45,000 but does not exceed $200,000; and

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subject to tax at a rate of 45 per cent on the part of their taxable income that exceeds $200,000.

1.6 Part II of Schedule 7 provides that foreign resident taxpayers are generally subject to tax at a rate of:

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30 per cent on the part of their taxable income that does not exceed $200,0000; and

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45 per cent on the part of their taxable income that exceeds $200,000.

1.7 Part III of Schedule 7 sets out special rules that apply to the income of working holiday makers in Australia. Taxable income from these activities (subsequently referred to as 'working holiday taxable income') is generally taxed at the tax rates for Australian residents. However, working holiday makers do not benefit from the tax-free threshold and the rate of tax that applies to income not exceeding $45,000 is 15 per cent.

Comparison of key features of new law and current law

Table 1.1 Comparison of new law and current law

Detailed explanation of new law

1.8 Schedule 1 to Cost of Living Tax Cuts Bill amends Schedule 7 for the 2024-25 and later income years as they apply to individuals and taxpayers taxed as individuals.

1.9 For residents, individual taxpayers are:

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not subject to tax on the part of their ordinary taxable income that does not exceed $18,200;

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subject to tax at a rate of 16 per cent on the part of their taxable income that exceeds $18,200 but does not exceed $45,000;

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subject to tax at a rate of 30 per cent on the part of their taxable income that exceeds $45,000 but does not exceed $135,000;

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subject to tax at a rate of 37 per cent on the part of their taxable income that exceeds $135,000 but does not exceed $190,000; and

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subject to tax at a rate of 45 per cent on the part of their taxable income that exceeds $190,000.

[Schedule 1 to the Cost of Living Tax Cuts Bill, item 2, table under clause 1 of Part I of Schedule 7]

1.10 For foreign residents, individual taxpayers are:

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subject to tax at a rate of 30 per cent on the part of their taxable income that does not exceed $135,000;

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subject to tax at a rate of 37 per cent on the part of their taxable income that exceeds $135,000 but does not exceed $190,000; and

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subject to tax at a rate of 45 per cent on the part of their taxable income that exceeds $190,000.

[Schedule 1 to the Cost of Living Tax Cuts Bill, item 3, table under clause 1 of Part II of Schedule 7]

1.11 For working holiday taxable income, individual taxpayers are:

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subject to tax at a rate of 15 per cent on the part of their working holiday taxable income that does not exceed $45,000;

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subject to tax at a rate of 30 per cent on the part of their working holiday taxable income that exceeds $45,000 but does not exceed $135,000;

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subject to tax at a rate of 37 per cent on the part of their working holiday taxable income that exceeds $135,000 but does not exceed $190,000; and

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subject to tax at a rate of 45 per cent on the part of their working holiday taxable income that exceeds $190,000.

[Schedule 1 to the Cost of Living Tax Cuts Bill, item 4, table under clause 1 of Part III of Schedule 7]

1.12 To avoid doubt, the amendments do not impact the tax-free threshold of $416 on eligible income (taxation of minors) under Schedule 11.

Consequential amendments

1.13 To support the amendments, a new definition is included in subsection 3(1) which aligns with the drafting convention prior to the amendments. The term 'third resident personal tax rate' refers to the rate mentioned in item 3 of table in clause 1 of Part I of Schedule 7 that is applicable to the year of income. In the context of the amendments, this refers to 37 per cent.

[Schedule 1 to the Cost of Living Tax Cuts Bill, item 1, definition of 'third resident personal tax rate' in subsection 3(1)]

Commencement, application, and transitional provisions

1.14 Cost of Living Tax Cuts Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day Cost of Living Tax Cuts Bill receives Royal Assent.

1.15 The amendments apply to the 2024-25 and later income years.