Federal Budget 2017: Personal Taxation
Wednesday 10 May 2017
No change to personal tax rates; Budget deficit levy to end
The 2017–2018 Federal Budget contained no changes to the personal income tax rates and thresholds. This means that the 2% budget deficit levy on incomes over $180,000 will not be extended beyond its initial three years, and will cease on 30 June 2017.
The tax rates for foreign residents for 2017–2018 will be the same as those for 2016–2017, except that the top marginal rate will be 45%, reflecting the removal of the 2% temporary budget deficit levy.
The currently legislated low income tax offset (LITO) rates have not changed.
Medicare levy increase to 2.5% from 1 July 2019
The Government will increase the Medicare levy to 2.5% from 1 July 2019 (up 0.5% from the current 2% Medicare levy) to ensure the National Disability Insurance Scheme (NDIS) is fully funded and to guarantee Medicare. Other tax rates that are linked to the top personal tax rate, such as the FBT rate, will also be increased.
Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.
The increase in the Medicare levy is estimated to raise $8.2 billion over the forward estimates, being the net impact across all heads of revenue, not just the Medicare levy. The Government said it will credit $9.1 billion to the NDIS Savings Fund Special Account when it is established.
Low income thresholds for 2016–2017
The Medicare levy low-income threshold for singles will be increased to $21,655 (up from $21,335 for 2015–2016). For couples with no children, the family income threshold will be increased to $36,541 (up from $36,001 for 2015–2016). The additional amount of threshold for each dependent child or student will be increased to $3,356 (up from $3,306).
For singles eligible for the Seniors and Pensioners Tax Offset, the Medicare levy low-income threshold will be increased to $34,244 (up from $33,738 for 2015–2016). The family threshold for seniors and pensioners will be increased to $47,670 plus $3,356 for each dependent child or student.
Higher Education HELP changes confirmed
The Budget confirmed the announcement on 1 May 2017 by the Minister for Education and Training, Simon Birmingham, of the Higher Education Reform Package to take effect generally from 1 January 2018.
Changes to FTB Part A payments
The Budget confirmed that, from 1 July 2017, Family Tax Benefit Part A supplement payments will be reduced by $28 per fortnight for each child who does not meet the Government immunisation requirements.
Changes to dollar income test taper
The Government will implement a consistent 30 cents in the dollar income test taper for Family Tax Benefit Part A families with a household income in excess of the Higher Income Free Area (currently $94,316) from 1 July 2018. This will ensure that higher income families are subject to the same income test taper rates.
Proposed Part A rate increase not proceeding
The Government will achieve savings of $1.9 billion over four years from 2017–2018 by not increasing the maximum rate of Family Tax Benefit Part A, which was announced as part of the 2015–2016 Mid-Year Economic and Fiscal Outlook.
A standard tax deduction for work expenses? Not in this Budget
Talk of allowing individual taxpayers a standard tax deduction for work-related expenses (WRE) has been around for more years than we may care to remember. However, despite much speculation before the Budget, it was silent on such a proposal.
The Henry Tax Review in 2010 recommended a standard deduction to cover work-related expenses and the cost of managing tax affairs to simplify personal tax for most taxpayers. Taxpayers should be able to choose either to take a standard deduction or to claim actual expenses above the claims threshold, with full substantiation. Then, in the 2010–2011 Federal Budget, the Government announced that it would provide individual taxpayers with a standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012, to increase to $1,000 from 1 July 2013. Of course, that did not proceed.
On 30 March 2015, the Treasurer released a tax discussion paper which also discussed WRE. Given the high proportion of taxpayers who incur a relatively low total value of legitimate WREs, the paper suggested a standard deduction could provide significant compliance savings. Rather than substantiating WRE expense claims with receipts, these taxpayers could “tick a box” to claim a standard deduction at a set amount. While it could deliver a simplicity benefit, the paper noted that a standard deduction would come at significant cost – people who do not currently have any WRE deductions could reduce their taxable income by the value of the standard deduction. The discussion paper was meant to be a precursor to a Green Paper covering tax options in the second half of 2015 and a tax reform White Paper before the 2016 Federal election, but neither eventuated.
Most recently, on 22 November 2016, the Treasurer asked the House of Representatives Standing Committee on Economics to inquire into and report on tax deductibility, specifically on the deductibility of expenditure by individuals in earning assessable income (including, but not limited to, a comparison with NZ and the UK), and deductibility of interest incurred by businesses. The Committee held a hearing in Canberra on 27 March 2017 (with a particular focus on WREs) but has not yet reported back to the Government. It heard that during the 2015 year, nearly $22 billion in work-related tax deductions were claimed. These claims have increased by 21% over the past five years, and the ATO has expressed concern about the level of non-compliance in relation to WRE.
It has been suggested that a standard tax deduction of $2,000 would be appropriate (the statistics reveal that is about the average of claims made). Perhaps taxpayers could be given the option of claiming the standard deduction or, if they wish to claim more, substantiating in full. Overall, any steps to help minimise tax compliance complexity and cost are welcome, but of course, revenue implications would have to be factored in.
So the idea of a standard tax deduction has received plenty of attention in recent years. A standard deduction would of course constitute a hit to the revenue, although it could be clearly quantified. Maybe for another time, or maybe not at all.