Individual income tax rate and tax offset changes
brought forward
The legislated changes to the individual income tax rates will be brought forward from 1 July 2022 to 1 July 2020. Individual tax offsets will be realigned from 1 July 2020, with the legislated increase to the low income tax offset (LITO) brought forward, and the low and middle income tax offset (LMITO) retained for one year.
Income tax rates
The 2019/20 Federal Budget announced a 3 phase personal income tax plan, commencing from the 2018/19 income year. The second phase of the plan included changes to the 19% and 32.5% tax brackets. The 2020/21 Federal Budget intends to bring these changes forward from 1 July 2022 to 1 July 2020.
The changes include:
- raising the 19% bracket from $37,000 to $45,000, and
- raising the 32.5% bracket from $90,000 to $120,000.
The proposed income tax brackets from 1 July 2020 are as follows.
| Minimum | Maximum | Tax on minimum | Tax rate on excess |
| — | $18,200 | — | 0% |
| $18,201 | $45,000 | — | 19% |
| $45,001 | $120,000 | $5,092 | 32.5% |
| $120,001 | $180,000 | $29,466 | 37% |
| $180,001 | and above | $51,666 | 45% |
The above will apply until 30 June 2024. The legislated changes as part of stage 3 of the personal income tax plan are unchanged and will commence on 1 July 2024.
Personal tax offsets
With the commencement of phase 2 of the personal income tax plan from 2020/21, changes to LITO will also be brought forward two years to 1 July 2020.
From 1 July 2020, LITO will increase from $445 to $700. Individuals who have a taxable income below $37,500 will be entitled to the full non-refundable tax offset. Above this amount, LITO is tapered off at two different levels. Individuals with taxable incomes between:
- $37,500 and $45,000 will be tapered off at 5 cents per dollar, and
- $45,000 and $66,667 will be tapered off at 1.5 cents per dollar.
Phase 2 of the plan previously marked the end of LMITO, introduced as a temporary measure in the 2019/20 Federal Budget. Despite phase 2 being brought forward, LMITO will remain in place for the 2020/21 income year. The LMITO rates are as follows:
| Taxable income | Low and middle income tax offset |
| Less than $37,000 | $255 |
| Between $37,000 and $48,000 | Increasing by 7.5c per $1, capped at $1,080 |
| Between $48,000 and $90,000 | Maximum $1,080 |
| Between $90,000 and $126,000 | Reducing from maximum at 3c per $1 |
| Above $126,000 | $0 |
The new effective tax-free threshold for individual Australian tax residents is $23,226 for the 2020/21 income year.
Source: Budget Paper No 2, pp 18–19; Glossy “Tax relief to back hard-working Australians and to create more jobs”.
For those people who receive a range of government payments, including aged pension, carer payment and family tax benefit, they will receive two $250 cash payments paid in December and March 2021.
The overall impact of these changes on disposable incomes will depend on what households do with the tax cuts and extra government payments. The extent to which they are saved or used to repay debt will diminish the impact on the economy. In short, the tax cuts need to be spent if they are to help create jobs and boost growth.