Personal Tax

Although there were no changes announced as part of the Budget to resident individual income tax rates and thresholds, one consequence of the new carbon pricing mechanism, which is now legislated to commence on 1 July 2012, is that new rates and thresholds (including the Low Income Tax Offset) for residents have already been enacted. These will apply to resident individuals from 1 July 2012 (see table below) (with further changes to apply from 1 July 2015). Changes were announced in the Budget to affect the tax rates applicable to non-resident individuals and also to some tax offsets, which are addressed below.

Although the 2012-13 rate changes for resident taxpayers are welcomed by low income earners, higher income earners will receive no real benefits. Higher income earners will also feel the full impact of the reduced Private Health Insurance Rebate which is to apply to premiums paid on and after 1 July 2012 (see below). That said, some (limited) relief for higher income earners can be found through the removal of the Flood and Cyclone Reconstruction levy which will no longer apply after 30 June 2012.

Individual taxpayers will be disappointed that the proposed 50 per cent discount for interest income and the standard tax deduction for work-related expenses (both due to commence on 1 July 2013) are no longer proceeding.

Personal income tax rates 2013

The resident individual income tax rates* for the 2012-13 financial year are set out below. The key change from 2011-12 is the increase in the tax-free threshold from $6,000 to $18,200.
Taxable income threshold range ($) 2012-13 marginal tax rate (%)
0 – 18,200 0
18,201 – 37,000 19
37,001 – 80,000 32.5
80,001 – 180,000 37
180,001 + 45

Personal income tax comparison chart*

Taxable income ($) 2012-13 tax payable ($) 2011-12 tax payable ($)
50,000 7,797 8,550
75,000 15,922 16,050
100,000 24,947 24,950
150,000 43,447 43,450
200,000 63,547 63,550
300,000 108,547 108,550
400,000 153,547 153,550
500,000 198,547 198,550
*Rates and amounts shown relate to resident adult individual taxpayers. Excludes Medicare levy and surcharge, Flood and Cyclone Reconstruction levy (2011-12 only), the Low Income Tax Offset and any other tax offset entitlements.

Changes to tax rates for non-residents

From 1 July 2012, the Government will adjust the personal income tax rates for non-residents and merge the first two marginal thresholds into one threshold to better align the rates and thresholds with those that will apply for residents.

The rate of 32.5 per cent will apply to all taxable income of non-residents below $80,000. From 1 July 2015, the marginal rate will increase from 32.5 per cent to 33 per cent for all income below $80,000.

It is assumed that the marginal rate of 37 per cent will continue to apply to taxable income between $80,000 and $180,000 and 45 per cent for taxable income exceeding $180,000.

Employers of expatriates who have departed Australia under a typical tax equalisation arrangement covering deferred bonus payments and shares and rights under an employee share scheme will have a corresponding increase in the Australian tax costs they must eventually meet on behalf of the expatriate employee.

Medicare levy low-income thresholds increase

For the 2011-12 year, the Medicare levy low-income threshold will increase to $19,404 for individuals (from $18,839) and $32,743 (from $31,789) for families. The additional amount of threshold for each dependent child or student will also be increased to $3,007 (from $2,919). The Medicare levy low-income threshold for pensioners below Age Pension age will also be increased. From 1 July 2011, the threshold will rise to $30,451 (from $30,439). This increase is intended to ensure that pensioners below Age Pension age do not pay the Medicare levy when they do not have an income tax liability. From 1 July 2012, the low-income threshold for this group will be fixed at the level applicable to the Senior Australians Tax Offset (SATO).

Changes to Private Health Insurance Rebate and Medicare levy surcharge

Measures have already been enacted to change the entitlement to the Private Health Insurance Rebate and the Medicare levy surcharge which will be income tested against three income tier thresholds. The income thresholds that apply for the 2012-13 financial year are set out below.

In view of these changes, affected individuals should consider the financial effect of their private health insurance coverage. It may be possible to retain the full 30 per cent rebate currently available if a private health insurance premium for the 2012-13 year is prepaid before 1 July 2012.
  Full entitlement Tier 1 Tier 2 Tier 3
Taxable income
Singles $84,000 or less $84,001 - $97,000 $97,001 - $130,000 > $130,000
Families $168,000 or less $168,001 - $194,000 $194,001 - $260,000 > $260,000
Rebate
Aged under 65 years 30% 20% 10% 0%
Aged 65-69 years 35% 25% 15% 0%
Aged 70 or over 40% 30% 20% 0%
Medicare Levy surcharge
All ages 0.0% 1.0% 1.25% 1.5%

Schoolkids Bonus

In the lead up the Budget, the Government announced that the Education Tax Refund will be replaced by a new Schoolkids Bonus from 1 January 2013. Under the Schoolkids Bonus, eligible families will receive:
  • $410 for each child in primary school, and
  • $820 for each child in high school.
Payment of the Bonus will occur upfront, twice a year, at the beginning of Term 1 and Term 3 of the school year.

Eligibility for the new Schoolkids bonus is the same as for the existing Education Tax Refund. The Bonus will be available to families receiving the Family Tax Benefit (FTB) Part A, young people in school receiving Youth Allowance and some other families receiving income support and veterans’ payments.

A key change from the existing scheme is that paperwork is not required, i.e. eligible recipients will no longer be required to keep a record of eligible child education expenses, as was the case with any claim for the Education Tax Refund in the annual income tax return. Furthermore, recipients are guaranteed to receive the full amount of the entitlement, regardless of the amount of education expenses they incur.

The Government has also announced that as part of the transition from the Education Tax Refund to the new Schoolkids Bonus, the Education Tax Refund for the 2011-12 income year will be paid out in full to all eligible families as a lump sum payment in June 2012. It is unclear whether families will be able to continue to claim the Education Tax Refund through their income tax return for the period 1 July 2012 to 31 December 2012.

The Schoolkids Bonus is clearly a priority for the Government as legislation to give effect to this measure is expected to be introduced into Parliament this week.

Tax Offsets

Changes to the net medical expenses tax offset

From 1 July 2012, for taxpayers with adjusted taxable income above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families) the net medical expense claim threshold will be increased from $2,000 to $5,000 (indexed annually) and the rate of reimbursement for eligible out of pocket expenses incurred will be reduced from twenty to ten per cent. Those with adjusted taxable income below the relevant threshold are unaffected.

Phase out of the mature age worker tax offset

From 1 July 2012, the mature age worker tax offset will be phased out for taxpayers born on or after 1 July 1957. Access to the mature age worker tax offset will be maintained for taxpayers who are aged 55 years or older in 2011-12. The Government proposes to redirect the savings from this measure towards programs which improve the training and workplace development skills of mature age workers.

Consolidation of dependency tax offsets

From 1 July 2012, the Government will consolidate eight dependency tax offsets into a single, streamlined and non-refundable offset available to taxpayers who maintain a dependant who is unable to work due to disability or carer responsibilities.

As the new consolidated offset will be based on the highest rate of the existing offsets being replaced, many eligible taxpayers will benefit from an increased entitlement. Taxpayers who are currently eligible to claim more than one offset amount in respect of multiple dependants who are genuinely unable to work will still be able to do so.

Capital Gains Tax

Deceased estates

There will be further tweaking of last year's Federal Budget proposals to amend the capital gains tax (CGT) treatment of deceased estates. Broadly, these proposals were designed to enshrine in the law the current Australian Taxation Office (ATO) practice of allowing a testamentary trust to distribute an asset of a deceased person without a CGT taxing point occurring. On 27 May 2011, Treasury released a paper setting out how the measure might be implemented.

The Government has now announced that it will make a series of minor amendments to the 2011-12 Budget measure to ensure the ‘proper functioning’ of the provisions.

The latest changes announced:
  • seek to reduce compliance costs by ensuring that the deceased's tax return does not need to be amended as the taxing point will be recognised by the entity transferring the asset
  • modify the application dates for two of the minor changes announced in the 2011-12 Budget to ensure that taxpayers are not disadvantaged, and
  • broaden the scope of the integrity provisions to also apply to assets passing via survivorship.

Compensation payments and insurance policies

Minor amendments will be made to the law to clarify the CGT exempt treatment that applies to compensation, damages and life insurance payments flowing through trusts.

Family Tax Benefit Part A

The Government announced changes to limit eligibility for FTB Part A to young people under 18 years of age or, where a young person remains in secondary school, the end of the calendar year in which they turn 19. Individuals who no longer qualify for FTB Part A may be eligible to receive Youth Allowance subject to usual eligibility requirements. This change will apply from 1 January 2013.

In addition, from 1 July 2013 the Government will increase the maximum payment rate of FTB Part A by $300 per year for families with one child and $600 per year for families with two or more children. For families receiving the base rate of FTB Part A, the increase will be $100 per year for families with one child and $200 per year for families with two or more children.