Federal Budget update

Personal tax rates and offsets for 2023–2024 and beyond

Amid the cost-of-living crunch and global uncertainty, Treasurer Jim Chalmers has handed down his second Budget. A Budget surplus of $4.2 billion is forecast in 2022–2023, but an underlying cash deficit of $13.9 billion is expected in 2023–2024 and a $35.1 billion deficit for 2024–2025. 

With no announced changes in the Federal Budget to personal tax rates and offsets for the 2023–2024 income year and beyond, now is the time to do some tax planning for the current and future years. For the 2022–2023 and 2023–2024 income years, the rates and income thresholds that have applied since the 2021–2022 income year will continue to apply. However, some individuals may find themselves paying more tax for the 2022–2023 income year due to the end of the low and middle income tax offset (LMITO).

Despite widespread calls to scrap the already legislated Stage 3 tax cuts, the Federal Government did not announce any changes in the recent Budget, which means the tax cuts are still set to commence from 1 July 2024 (ie the 2024–2025 income year). Additionally, no changes were announced in the Budget to the current personal tax rates, meaning that the rates and income thresholds that have applied since the 2021–2022 income year will continue to apply.

The already legislated Stage 3 tax cuts will reduce the 32.5% marginal tax rate to 30%, leading to one big tax bracket between $45,000 and $200,000, along with the abolishment of the 37% tax bracket from the 2024–2025 income year. The original aim of these changes (under the previous government) was to align the middle tax bracket of the personal income tax system with corporate tax rates. In detail, the brackets and rates are as follows: 

• $0 to $18,200: nil tax payable;
• $18,201 to $45,000: nil + 19% of excess over $18,200;
• $45,001 to $200,000: $5,092 + 30% of excess over $45,000; and
• $200,001+: $51,592 + 45% of excess over $200,000.

However, some individuals may find themselves paying more tax for the 2022–2023 income year due to the end of the LMITO. The LMITO applied to individuals with taxable income of less than $126,000. For the 2021–2022 income year, those earning a taxable income of $90,000 received an offset of $1,500 which reduced by 3 cents for every dollar of income above $90,000, tapering off at an income of $126,000. 

For the 2022–2023 income year and onwards, only the low income tax offset (LITO) will apply. The maximum amount of the offset is $700 and will apply to individuals with taxable incomes of less than $37,500. Those earning between $37,501 and $45,000 will get $700 minus 5 cents for every dollar above $37,500. Individuals with taxable incomes between $45,001 and $66,667 will get $325 minus 1.5 cents for every dollar above $45,000. Taxpayers earning more than $66,667 are not eligible for the LITO.

Example

Jerry earns a taxable income of $95,000 for the 2022–2023 income year. He is not eligible for the LITO as his taxable income is too high, and the LMITO no longer applies. His amount of tax payable for the 2022–2023 income year based on the current tax rates is $21,342. Previously, in the 2021–2022 income year when the LMITO applied, Jerry’s tax payable of $21,342 would have been reduced by $1,350 to $19,992. 

If Jerry is still earning the same taxable income of $95,000 in the 2024–2025 income year due to wage stagnation, based on the legislated Stage 3 tax cut rates his tax payable would be $20,092, a projected reduction of $1,250 from his 2022–2023 and 2023–2024 tax payable.

It should also be noted that the Stage 3 tax cuts not only apply to Australian residents, but also to foreign residents and working holiday makers from the 2024–2025 income year. As legislated from 1 July 2024, foreign residents will only pay 30% on taxable income of up to $200,000. Currently, the lowest rate for foreign residents is 32.5% on taxable income of up to $120,000. For working holiday makers, from 1 July 2024 the 32.5% marginal tax rate will be cut to 30% for one big tax bracket between $45,000 and $200,000 of income, as per the rates for Australian residents.

What’s in the Budget for small businesses

For small businesses, the government has proposed to temporarily increase the instant asset write-off threshold from 1 July 2023 to 30 June 2024. In previous years, the temporary full expensing effectively replaced the instant asset write-off regime and applied for assets held/first used/installed ready for use between 6 October 2020 to 30 June 2023. This allowed eligible businesses to immediately deduct the business portion of an asset’s cost with no general limit, although specific cost limits on certain assets, such as cars, applied. 

With the expiration of the legislated temporary full expensing, eligible small businesses with an aggregated annual turnover of less than $10 million will be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. The $20,000 limit will apply on a per asset basis, so small businesses are able to instantly write-off multiple assets. 

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. In addition, the “lock-out” rule that prevents small businesses from re-entering the simplified depreciation regime for five years if they opt-out will continue to be suspended until 30 June 2024.

The government has also announced a lodgment penalty amnesty program for small businesses (with an aggregate turnover of less than $10 million). The amnesty will remit failure-to-lodge (FTL) penalties for outstanding tax statements lodged in the period from 1 June 2023 to 31 December 2023 that had original due dates between 1 December 2019 to 29 February 2022. 

Currently, the FTL penalty is $275 per penalty unit. Small entities are liable to the FTL penalty at a rate of one penalty unit for each period of 28 days (or part thereof) that the return or statement is overdue, up to a maximum of five penalty units. For medium entities (ie a medium withholder for PAYG purposes or one who has assessable income or a current GST turnover of more than $1 million and less than $20 million) the penalty unit is multiplied by two and applies at the same rate as small entities. It is hoped that the amnesty will encourage small businesses to re-engage with the tax system. 

In conjunction with the amnesty, the government will also be providing funding to the ATO from 1 July 2023 over four years to assist with engaging more effectively with businesses to address the growth of tax and superannuation liabilities. Specifically, the funding will facilitate ATO engagement with taxpayers who have high-value debts over $100,000 and aged debts (ie more than two years) of either public/multinational groups with aggregated turnover of greater than $10 million, or privately owned groups or individuals controlling over $5 million of net wealth.