Article:

New personal income tax rates

02 July 2018

Stephanie Sims, Senior, Tax |

Personal income tax relief

In the recent May Budget, the Federal Government announced changes to individual tax rates for the 2018/19 income year, as part of a 3-step 7-year personal income tax reform plan targeted at low and middle income earners. These changes recently passed into law without amendment by Federal Parliament.

In addition to the existing Low Income Tax Offset (‘LITO’) of $445, the first step provides a new non-refundable Low and Middle Income Tax Offset for the years ending 30 June 2019 - 30 June 2022. The offset provides a benefit of up to $200 for taxpayers with income less than $37,000, up to $530 for taxpayers with income up to $48,000, and thereafter phases out for taxpayers with income up to $125,333.

The next step provides for the upper limit of the 32.5% tax bracket to increase from $87,000 to $90,000 starting in the 2018/19 tax year. The upper limit of the 32.5% tax bracket will further increase in 2022/23 to $120,000. Also in 2022/23 the upper limit of the 19% tax bracket will increase from $$37,000 to $41,000.  In 2022/23 the existing LITO and the new Low and Middle Income Tax Offset will be combined into a new LITO with a maximum offset of $645.

The last measure in the series of three, is to increase the upper limit of the 32.5% tax bracket from $120,000 to $200,000, eliminating the 37% tax bracket completely.

The changes also aim to address ‘bracket creep’. As wages increase as a result of inflation, more employees start paying tax in the higher tax brackets and extra payments such as overtime and bonuses therefore also get taxed at the higher rate, reducing their inflation adjusted take-home pay.  To help encourage workforce participation and to strengthen the post-mining economy, instead of simply increasing the tax-free threshold, the third tax bracket was targeted to specifically help the middle income employees who found themselves being pushed into the higher tax bracket (albeit marginal). By stretching the upper limit of the brackets, more individuals can stay within the lower brackets for a longer period of time.

The Bill containing the changes received Royal Assent in June 2018.

Updated tax tables

From 1 July 2018 to 30 June 2022

Australian Resident Individuals
Taxable Income bracket ($) Tax ($)
0 – 18,200 0
18,201 – 37,000 19c for each $1 over $18,200
37,001 – 90,000 3,572 plus 32.5c for each $1 over 37,000
90,001 – 180,000 20,797 plus 37c for each $1 over 90,000
180,001 & over 54,097 plus 45c for each $1 over 180,000
Australian Non-Resident Individuals
Taxable Income bracket ($) Tax ($)
0 – 90,000 32.5c for each $1
90,001 - 180,000 29,250 plus 37c for each $1 over
180,001 & over 62,550 plus 45c for each $1 over 180,000

*Note the above rates do not include the Medicare levy.

Future rates and thresholds (Australian Tax Residents)

Rate 2018-19 to 2021-22 2022-23 to 2023-24 2024-25 onwards
0% $0 - $18,200 $0 - $18,200 $0 - $18,200
19% $18,201 - 37,000 $18,201 - 41,000 $18,201 - $41,000
32.5% $37,001 - 90,000 $41,001 - 120,000 $41,001 - $200,000
37% $90,001 - $180,000 $120,001 - $180,000 N/A
45% $180,001+ $180,001+ $200,001+

Employers

Unlike the last tax bracket increase in October 2016, as the change is effective from 1 July 2018 (the start of the tax year), there is no need to consider an adjustment for Pay-As-You-Go Withholding (‘PAYG’), and the general end-of-year payroll software updates should automatically account for the change in PAYG rates.