There has been some exciting changes to the personal income tax rates thanks to the new Federal Budget that has been handed down.  However, there is certainly some confusion around what the tax cuts actually mean and who is effected by them.

Essentially, there are three “tax brackets” that have changed, and these changes have been backdated to 1st July 2020.

  • The 19% rate applies to income between $18,200 – $45,000
  • The 32.5% rate applies to income between $45,001 – $120,000
  • The 37% rate applies to income between $120,001 – $180,000

The Budget was applied on 6th October 2020, so when you do your 2021 income tax return, you will benefit from the excess tax you have been paid between 1st July and 6th October 2020 as a larger refund (or reduction in the amount that is payable).  So let’s put into practice these changes for the exciting personal income tax rates so you can see where the benefits lie…

FOR EXAMPLE

Oliver earns $44,000 per year;

  • Under the old tax rate, he would pay $5,847 (excl Medicare Levy)
  • Under the new tax rate, he would pay $4,902 (excl Medicare Levy)

Taylor earns $79,000 per year;

  • Under the old tax rate, he would pay $17,222 (excl Medicare Levy)
  • Under the new tax rate, he would pay $16,142 (excl Medicare Levy)

WHAT IS THE MEDICARE LEVY?

The Medicare Levy helps fund some of the costs of  Australia’s public health system, known as Medicare.  The Medicare levy is 2% of your taxable income, in addition to the tax you pay on your taxable income.  It is possible for there to be a reduction or exemption from paying the Medicare Levy, depending on your and your spouse’s circumstances.  You need to consider your eligibility for a reduction or an exemption separately.  Have a look at the Medicare Levy calculator to work out your Medicare levy.

LOW INCOME TAX OFFSET

As an added bonus, there has also been some changes to the Low Income Tax Offset and the Low and Middle Income Tax Offset, see below:

  • The Low Income Tax Offset has also increased to $700 per year for incomes under $37,500 and then reduces
  • The Low and Middle Income Tax Offset has been retained for another year and is $1,080 for taxable incomes between $48,001 – $90,000.  A further $255 for taxable incomes of less than $37,000

If you would like more information on any of the Federal Budget that was handed down earlier this year, get in touch with our team and we would be happy to go through these changes with you.

 

Amanda Wilkens – Director

CPA