Tax

Savings for all

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Raising the threshold for the 30% tax rate means tax cuts for the vast majority of Australians. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

There is a tax cut for everybody in this budget. The personal tax rate thresholds are rising and the tax office will introduce a new system to make it easier for most people to file a tax return.

More than 80% of taxpayers face a top marginal tax rate of 30% or less. A taxpayer must earn $134,000 to pay an average tax rate of 30% in 2008-09, Treasurer Peter Costello said. Taxpayers will not reach the top marginal tax rate until they earn more than three-and-a-half times average weekly earnings in 2008-09.

From July 1, 2007, the 30% personal tax rate threshold will increase from $25,001 to $30,001; and the low income tax offset (LITO) will increase from $600 to $750 and will begin to phase out from $30,000. Taxpayers eligible for the full LITO will not pay tax until their annual income exceeds $11,000 (up from $10,000).

From July 1, 2008, the 40% threshold will increase from $75,001 to $80,001; and the 45% threshold will increase from $150,001 to $180,001.

Resident rates

The current tax rate scales for residents (excluding Medicare levy) applicable for 2006-07.

 

RESIDENTS: TAX RATES – 1 JULY 2006-30 JUNE 2007

Taxable income ($)

Tax payable ($)

0 – 6,000

Nil

6,001 – 25,000

Nil + 15% of excess over 6,000

25,001 – 75,000

2,850 + 30% of excess over 25,000

75,001 – 150,000

17,850 + 40% of excess over 75,000

150,001+

47,850 + 45% of excess over 150,000

The resident tax rates as proposed by the 2007-08 Budget are as follows:

PROPOSED RESIDENT RATES: 1 JULY 2007-30 JUNE 2008

Taxable income ($)

Tax payable ($)

0 – 6,000

Nil

6,001 – 30,000

Nil + 15% of excess over 6,000

30,001 – 75,000

3,600 + 30% of excess over 30,000

75,001 – 150,000

17,100 + 40% of excess over 75,000

150,000+

47,100 + 45% of excess over 150,000

PROPOSED RESIDENT RATES: 1 JULY 2008 ONWARDS

Taxable income ($)

Tax payable ($)

0 – 6,000

Nil

6,001 – 30,000

Nil + 15% of excess over 6,000

30,001 – 80,000

3,600 + 30% of excess over 30,000

80,001 – 180,000

18,600 + 40% of excess over 80,000

180,001+

58,600 + 45% of excess over 180,000

As a result of the proposed threshold changes, the Government calculates that annual tax savings will be, for example:

$150 for those earning up to $25,000pa in 2007-08 and 2008-09;

$1100 for those earning $30,000–40,000 in 2007-08 and 2008-09; and

$750 for those earning $50,000–75,000 in 2007-08 and 2008-09.

NON-RESIDENT TAX RATES: 1 JULY 2006-30 JUNE 2007

Taxable income ($)

Tax payable ($)

0 – 25,000

Nil + 29%

25,001 – 75,000

7,250 + 30% of excess over 25,000

75,001 – 150,000

22,250 + 40% of excess over 75,000

150,001+

52,250 + 45% of excess over 150,000

PROPOSED NON-RESIDENT TAX RATES: 1 JULY 2007-30 JUNE 2008

Taxable income ($)

Tax payable ($)

0 – 30,000

29%

30,001 – 75,000

8,700 + 30% of excess over 30,000

75,001 – 150,000

22,200 + 40% of excess over 75,000

150,000+

52,200 + 45% of excess over 150,000

PROPOSED NON-RESIDENT TAX RATES: 1 JULY 2008 ONWARDS

Taxable income ($)

Tax payable ($)

0 – 30,000

29%

30,001 – 80,000

8,700 + 30% of excess over 30,000

80,001 – 180,000

23,700 + 40% of excess over 80,000

180,001+

63,700 + 45% of excess over 180,000

As a result of the threshold changes announced in the 2007-08 Budget, it is now interesting to compare the resident individual tax rates that have applied from the 2004-05 income year. They are set out in the following tables:

RESIDENT TAX RATE SCALES 2004-05 TO 2006-07

Thresholds
2004-05 ($)

Tax
rate

Thresholds
2005-06 ($)

Tax
rate

Thresholds
2006-07 ($)

Tax
rate

0 – 6,000

Nil

0 – 6,000

Nil

0 – 6,000

Nil

6,001 – 21,600

17%

6,001 – 21,600

15%

6,001 – 25,000

15%

21,601 – 58,000

30%

21,601 – 63,000

30%

25,001 – 75,000

30%

58,001 – 70,000

42%

63,001 – 95,000

42%

75,001 – 150,000

40%

70,001+

47%

95,001+

47%

150,001+

45%

PROPOSED RESIDENT TAX RATE SCALES 2007 ONWARDS

Proposed thresholds
1.7.2007-30.6.2008

Tax rate
%

Proposed thresholds
1.7.2008 and after

Tax rate
%

0 – 6,000

0

0 – 6,000

0

6,001 – 30,000

15

6,001 – 30,000

15

30,001 – 75,000

30

30,001 – 80,000

30

75,001 – 150,000

40

80,001 – 180,000

40

150,000+

45

180,001+

45

A comprehensive tax payable ready reckoner (for resident individuals) will be reproduced in Australia’s leading tax rates service, Thomson’s Tax Rates & Tables. The service also contains over 150 other annual tax data tables.

Source: Budget Paper No 2 [p 18]; Treasurer’s press release

CGT: Extending small superannuation fund roll over on marriage breakdown

The tax law will be amended to allow CGT rollover relief when one spouse in a marriage breakdown transfers their entire in specie interest in a small superannuation fund to another complying superannuation fund.

Currently, the CGT rollover for assets of small superannuation funds on marriage breakdown only applies to the spouse who benefits from a “payment split” made under the Family Law Act 1975 and only to the assets subject to the payment split. Furthermore, these assets can only be rolled over only to another small superannuation fund.

This new measure will facilitate complete separation of superannuation assets for spouses in a marriage breakdown and provide greater choice of fund to the spouse whose interest is transferred. This measure will apply from July 1, 2007.

Child Care Benefit and Rebate changes

The Government will make changes to the Child Care Benefit and Child Care Tax Rebate to provide more generous concessions. The rate of Child Care Benefit (CCB) will be increased by 10% (on top of annual indexation). As a result, a family on a maximum rate CCB with one child in Long Day Care for 40 hours per week will receive an extra $16.40 per week. This increase in CCB will apply from July 1, 2007. The existing Child Care Tax Rebate (CCTR) will be converted to a direct payment administered though Centrelink from July 1, 2007.

As a result, families will receive the CCTR (which covers 30% of out-of-pocket costs, up to a maximum of $4000, plus indexation) as a direct payment, soon after the financial year in which they incur child care costs. Under the measures, families will still receive a rebate for out-of-pocket costs incurred in 2005-06 under the existing arrangements. Accordingly, families with out-of-pocket costs for both 2005-06 and 2006-07 will receive two rebates in 2007-08 (ie, one through the tax system, and one as a direct payment).

Extra ATO funding to allow pre-filling of tax returns

In the 2007-08 budget, the Government announced it will provide additional funding of $20 million in 2007-08 to enable the tax office to pre-fill electronic individual income tax returns for the 2007-08 and following income years.

The pre-filling of tax returns is intended to make completing income tax returns easier for about nine million individual taxpayers who use e-tax or lodge their returns through tax agents. The Treasurer said these taxpayers account for about 80% of all individual taxpayers. According to the Government, nearly one million taxpayers will need to do no more than lodge their pre-filled return electronically.

The tax office will automatically include the following information in returns: salary, wages and allowances, where the employer has electronically lodged the employee’s payment summary with the tax office; dividend and interest income and distributions from managed funds; payments from Centrelink, the Department of Education, Science and Training and the Department of Veterans’ Affairs; Medicare out-of-pocket expenses and private health insurance information; and HECS and Higher Education Loan Program details.

This information will also be available to tax agents to help them complete returns on behalf of their clients. In addition, for taxpayers who made a small total deduction claim in the previous year, the tax office will enter the deduction amounts from the previous year.

According to the Treasurer, if taxpayers are satisfied that the pre-filled information is correct and they do not need to make changes or provide additional information, they can lodge their pre-filled return. Taxpayers with other sources of income, such as rental income, capital gains or foreign source income, will need to add this information to their pre-filled return, as will taxpayers whose employer has not lodged their payment summary electronically with the tax office.

Similarly, if taxpayers have additional information to provide, or offsets or deductions they wish to claim, these can be added to their return. Only a small proportion of payment summaries are not submitted to the tax office electronically.

Assistance to small business to help them report electronically is part of the New Business Intensive Assistance Program, also announced in the budget. The Government says it is providing $40 million over four years to provide individually focused advice and assistance to new businesses. This will include help with registering with the tax office business portal and completing the BAS.

Low income tax offset to be increased

The Government announced that, with effect from July 1, 2007, the low income tax offset will increase from $600 to $750 a year. In addition, the income threshold at which the offset begins to reduce will increase from $25,000 to $30,000. As a result, some offset can be claimed up to an income of $48,750 compared to $40,000 currently. The Government said taxpayers with annual incomes between $25,000 and $48,750 will benefit from both the increase in the 30% threshold to $30,001 and the increase in the low income tax offset.

Those eligible for the full low income tax offset will not pay tax until their annual income exceeds $11,000 (up from $10,000 currently).

SATO income thresholds increased

As a result of the tax threshold changes announced in the 2007-08 budget, from July 1, 2007, senior Australians who receive the senior Australians tax offset will be able to earn more income without paying tax. Singles will be able to have taxable income up to $25,867 (up from the current $24,867) and couples up to $43,360 (up from the current $41,360).

Medicare levy low income thresholds increased

The Government announced that it will increase the Medicare low income thresholds to $16,740 for individuals and $28,247 for families, with effect from July 1, 2006. The additional amount of threshold for each dependent child or student will also be increased to $2594. The increase in these thresholds takes into account movements in the CPI and ensures that low income families and individuals are exempt from paying the levy.

The Medicare levy low income threshold for pensioners below age-pension age will also be increased. From July 1, 2006, the threshold will rise to $21,637. This will ensure that pensioners below age-pension age do not pay the Medicare levy while they do not have an income tax liability.

Dependent spouse rebate to be increased

The Government has announced a substantial increase in the dependent spouse rebate to $2100 (up from $1655) for the 2007-08 financial year and beyond; ie, with effect from July 1, 2007. The Government says this increase will benefit taxpayers with a dependent spouse, who do not have a dependent child.

This change will also allow the dependent spouse to earn more income before the rebate is completely phased out. From July 1, 2007, the dependent spouse rebate will be completely phased out when the spouse has separate net income of $8681 (up from $6901 currently).

The full dependent spouse rebate is available to a resident taxpayer who contributes to the maintenance of a resident spouse whose separate net income does not exceed $282. The rebate is reduced by $1 for every $4 by which the dependent spouse’s separate net income exceeds $282.

One-off doubling of Government super co-contribution

The Government will pay a one-off additional co-contribution into the superannuation accounts of those persons who made eligible contributions in the 2005-06 income year. This payment will double the co-contribution paid in respect of that year, from a maximum of $1500 to $3000.

For example, if a person was eligible for a co-contribution of $1500 for the 2005-06 year, he or she will now receive an extra $1500, a total of $3000. Those who were eligible for a $500 co-contribution in 2005-06 would now be eligible for $1000.

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory, a leading Australian provider of tax, accounting and legal information solutions; www.thomson.com.au

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