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Australia Budget Cuts Personal Income Tax

Friday, May 11, 2018

In addition to extending an increased expensing limit for small firms, reforming the research and development tax incentive, and committing to further corporate tax cuts, the Australian Government has announced significant personal income tax relief in what is expected to be the last Budget before elections.

Budget 2018, announced on May 8, includes a three-step seven-year Personal Income Tax Plan, which includes the introduction of a Low and Middle Income Tax Offset, adjustments to offset the impact of bracket creep, and the removal of the 37 percent tax bracket to "flatten and simplify" the personal income tax system.

The first step will see the Government introduce a non-refundable tax offset of up to AUD530 (USD400) per year for four years, beginning in the 2018/19 tax year. The amount of the offset depends on income level, and phases out between AUD90,001 and AUD125,333.

The second step will see the Government increase the top threshold of the 32.5 percent income tax bracket from AUD87,000 to AUD90,000 from July 1, 2018. The 19 percent income tax bracket will then extended from AUD37,000 to AUD41,000 from July 1, 2022, with the 32.5 percent bracket extended from AUD90,000 to AUD120,000 on the same date.

Under the third step of the plan, the second-highest, 37 percent rate and bracket will be removed from July 1, 2024, with the 32.5 percent bracket extended to income up to AUD200,000, and the top 45 percent rate applying to income above this level.

Under current law, the first AUD18,200 is taxed at zero percent, then income up to AUD37,000 at 19 percent, up to AUD87,000 at 32.5 percent, up to AUD180,000 at 37 percent, and above AUD180,000 at 45 percent.

In a measure affecting small businesses, the AUD20,000 instant asset write-off first introduced by the 2015-16 Budget will be extended by a further 12 months to June 30, 2019, for businesses with aggregated annual turnover of less than AUD10m.

The Budget also included changes to the research and development tax incentive effective from July 1, 2018. These come in response to the recommendations of the 2016 Review of the incentive and are intended to ensure that the program is targeted more effectively.

Under the proposed changes, for companies with aggregated annual turnover of AUD20m or more, the Government will introduce a research and development premium that ties the rates of the non-refundable tax offset to the incremental intensity of research and development expenditure as a proportion of total expenditure for the year.

Research and development intensity is generally defined as expenditures by a firm on its research divided by the firm's sales.

Under the proposals, the marginal premium will be the claimant's company tax rate plus:

  • four percentage points for expenditure between zero percent to two percent intensity;
  • 6.5 percentage points for expenditure above two percent to five percent intensity;
  • nine percentage points for expenditure above five percent to 10 percent intensity; and
  • 12.5 percentage points for expenditure above 10 percent intensity.

The expenditure threshold will be increased from AUD100m to AUD150m per year.

For companies with aggregated annual turnover below AUD20m, the refundable offset will be a premium of 13.5 percentage points above a claimant's company tax rate. Cash refunds from the refundable tax offset will be capped at AUD4m per year. Tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years. However, refundable tax offsets from expenditure on clinical trials will not count towards the cap.

The Government also said that it remains committed to legislating for the Enterprise Tax Plan in full, under which the rate of corporate tax would fall to 25 percent for all companies, regardless of their size and turnover, by 2026.

Last year, the Government cut the small business rate to 27.5 percent and increased the turnover threshold for access to the rate to AUD50m (USD37.8m). The headline corporate tax remains at 30 percent for other companies.