There are very few Budget measures impacting on personal income taxes for individual taxpayers and families. The key change for individuals is an increase to the threshold at which the 37% marginal tax rate for individuals commences.
The low-income threshold for the Medicare levy and surcharge will also increase from the 2015/16 year.
The pause in the indexation of the income thresholds for the Medicare levy surcharge and the private health insurance rebate will also continue for another three years.
The 2% Budget deficit levy announced in the 2015/16 Budget will cease at the end of the 2016/17 financial year.
The Government has proposed to increase the taxable income at which the 37% tax rate applies from $80,000 to $87,000, with effect from 1 July 2016.
Under current tax rates (and excluding the 2% Medicare levy), taxable income within the $37,000 to $80,000 threshold is taxed at 32.5% and taxable income within the $80,000 to $180,000 threshold is taxed at 37%. Under the proposed changes, the $80,000 threshold will increase to $87,000 meaning taxable income within the $37,000 to $87,000 threshold will be taxed at 32.5% and taxable income within the $87,000 to $180,000 threshold will be taxed at 37%. The measures will apply to both Australian resident taxpayers and non-resident taxpayers.
The Government claims the measure will prevent approximately 500,000 taxpayers from being subject to the 37% tax rate for the next three years.
The low-income threshold for the Medicare levy and surcharge will increase in line with movements in the Consumer Price Index so that low income earners will generally continue to be exempt from paying the Medicare levy.
The pause in the indexation of the Medicare levy surcharge and the private health insurance rebate tiered income thresholds will continue for another three years. This will act as a form of “bracket creep” for taxpayers on medium to high incomes, resulting in taxpayers with private hospital cover paying more for their health insurance coverage, and those without private hospital cover paying additional Medicare Levy Surcharge.
The 2% Budget deficit levy announced in the 2014/15 Budget and originally legislated to apply for 3 years from 1 July 2014 will cease at the end of the 2016/17 year. This will result in a tax saving for taxpayers with taxable incomes of $180,000 or more.
Approximately 500,000 middle income taxpayers will benefit from the proposed changes. These taxpayers would have moved into the higher 37% marginal tax rate from the 2016/17 year, whereas now, they should avoid the higher marginal tax bracket for another three years.
High income earners will benefit marginally from the change in the income tax brackets with approximately $7,000 of taxable income earned above $80,000 being taxed at 32.5% as opposed to 37%.
Overall the benefit to taxpayers is minimal with an overall maximum tax saving of only $315 per year ($6 per week).
Unfortunately low income earners will see no benefit from the proposed budget changes other than an increase in the low-income threshold for the Medicare Levy and surcharge to account for movements in the consumer price index.
Middle and high income taxpayers who win with the cut in marginal tax rates may lose some of their tax cut through increases in Medicare Levy Surcharge or private health insurance premiums.
Case study 1
Matt is a middle income earner, his taxable income in the 2015/16 year was $80,000 and he is expecting this to increase to $85,000 in the 2016/17 year.
The tax payable on Matt’s taxable income under the current thresholds (not including the Medicare levy or surcharge) would be $19,397. Under the proposed changes, the tax payable on Matt’s taxable income would be reduced to $19,172, giving him an overall saving of $225.
Case study 2
Rachael’s taxable income in the 2015/16 year was $88,000 and she is expecting this to increase to $91,000 in the 2016/17 year. Rachael is young and single, and has not taken out a private health insurance policy with hospital cover.
The tax payable on Rachael’s taxable income under the current thresholds (including the Medicare levy) would be $23,437. Under the proposed changes, Rachael will benefit from the increase in the income tax threshold, but will become liable to pay the Medicare Levy Surcharge, resulting in her total tax payable increasing to $24,032, leaving her out of pocket by $595.