NO.043

PERSONAL INCOME TAX CUTS

From 1 July 2006, all Australian taxpayers will share in tax cuts worth $36.7 billion over the next four years. This is in addition to the $21.7 billion tax cuts provided in the 2005-06 Budget. The tax cuts will increase disposable incomes for all Australian taxpayers, provide further incentives for individuals to participate in the workforce and improve the international competitiveness of Australia’s tax system.

From 1 July 2006:

• the 30 per cent threshold will increase to $25,001;
• the 42 per cent marginal tax rate will be cut to 40 per cent and the threshold will increase to $75,001; and
• the top marginal tax rate will be cut from 47 per cent to 45 per cent and the threshold will increase to $150,001.

From 1 July 2006, the low income tax offset (LITO) will increase from $235 to $600 and will begin to phase-out from $25,000. Taxpayers eligible for the full LITO will not pay tax until their annual income exceeds $10,000 (up from $7,567).

In addition, the Medicare levy low income phase-in rate will be reduced from 20 per cent to 10percent. As a result, more low income taxpayers will pay a reduced rate of Medicare levy.

The fringe benefits tax rate will also be reduced from 48.5 per cent to 46.5 per cent, effective from 1April 2006.

The 2006-07 Budget tax cuts ensure that over 80 per cent of taxpayers face a top marginal tax rate of 30 per cent or less. A taxpayer will need to earn $121,500 to pay an average tax rate of 30percent.

Reducing the top marginal rate and significantly increasing the top threshold will improve Australia’s competitiveness compared with other OECD countries. The increase in the top threshold to $150,001 will mean that around 2 per cent of taxpayers will be subject to the top marginal tax rate and taxpayers will not reach the highest marginal tax rate until they earn more than three times average weekly earnings.

Attachment A shows the reduction in income tax that will be provided for Australian taxpayers, compared to their tax payable in 2005-06, over a range of incomes.

Senior Australians will also benefit from these changes. From 1 July 2006, senior Australians who receive the Senior Australians Tax Offset will be able to earn more income without paying tax. Singles will be able to have taxable income up to $24,867 (up from $21,968) and couples up to $41,360 (up from $36,494). The Medicare levy thresholds that apply to senior Australians will also be increased to ensure that they do not pay the Medicare levy until they begin to incur an income tax liability.

CANBERRA

9 May 2006

Contact:

David Alexander

(02) 6277 7340

Attachment A