Federal Government brings forward tax cuts for the 2020-21 financial year
To stimulate a struggling Australian economy, the Australian Federal Government has brought forward Stage 2 of their planned tax cuts and back dated them to 01 July 2020.
The cuts originally penned to come into effect July 2022, will now take place in the current financial year, providing tax cuts for millions of Australian tax payers.
What are the 2020-21 tax cuts?
The tax cuts include:
- An increase in the 19 per cent tax bracket from $37,000 to $45,000
- An increase in the 32.5 per cent tax bracket from $90,000 to $120,000
- Raise the low-income tax offset from $445 to $700
Essentially, these tax cuts mean that anyone earning above $37,001 will receive a change to their tax rate, and therefore more money in their pocket each pay period.
How much money will you receive from the tax cuts?
Your income influences how much you will receive from your tax cuts, with those falling into the higher income brackets ($120,000+) receiving the maximum benefit from the cuts:
- $21,886 – $45,000: up to $1080
- $45,001 – $90,000: $1080
- $90,001 – $120,000: up to $2430
- $120,000+: $2430
When you will receive the tax cut?
With the 2020-21 financial year in full swing, the cuts are scheduled to be in place by the end of 2020 therefore you should start seeing the cuts filter through to your take home pay by the end of the year.
Here’s an example of the tax cuts in practice:
Josie is a HR professional and earns $80,000 a year. Under the tax cuts she receives an additional $1,080 a year. Once the tax cuts are in place this equates to about an extra $20 a week extra in her take home pay.
Backdating the tax cuts
As the tax cuts are backdated to the beginning of the tax year (1st July 2020), you stand to see a boost come tax time as well.
Let’s look at the example of Josie from above again.
If the tax cuts are in place on 01 December, that means Josie already missed 5 months (or roughly 20 weeks worth of the tax cuts).
But, she doesn’t lose that money. Instead, she’ll get any missed money from the back-dated tax cuts back on her tax return instead. (20 weeks x $20 = $440).
This $440 will either increase her tax refund or reduce any tax she owes at tax time.
How do the tax cuts effect low and middle income earners?
There are two offsets available for low and middle income earners. Both are applied on your tax return as opposed to weekly tax cuts.
1. The Low Income Tax Offset (Increased this year)
Along with the tax cuts, the Government announced an increase to the Low Income Offset from $445 to $700.
Those earning up to $37,000 receive the full $700 rebate, meaning an extra tax offset of $255 for the 2020-21 financial year.
For individuals earning between $37,001 – $66,667 the low income offset is reduced by 1.5 cents in every dollar over $37,001.
2. Low and middle income tax offset (No change this year)
Low and middle income earners also receive the the “Low and Middle Income Tax Offset” (LMITO).
The amount of LMITO you’re entitled to depends on your taxable income:
|Taxable Income||2019-2020 LMITO Rebate Amount|
Low and Middle Income Earners May Pay More Tax Next Year
Originally, the LMITO was scheduled to end with the introduction of the stage 2 tax cuts however the Federal Government will keep the LMITO for the 2020-21 tax year.
However, from 2021-22 the LMITO is removed. The end result is that some low and middle income earners may actually pay up to $1,080 more tax than they did this year.
In the 2022 the Federal Government announced an increase to the LMITO for the 2022 income year, you can read more about it here.
How will the tax cuts effect high income earners?
Australians who earn above $120,001 receive the maximum benefit from the cut and see a reduction in their tax of $2430 this year.
These cuts will continue into future tax years until Stage 3 cuts are put into place in July 2024.
Stage 3 tax cuts
The tax cuts introduced in Stage 2, are part of a 3 Stage tax cut program by the Federal Government to reduce the income tax rate for Australians.
Under stage 3 tax cuts (slated for July 2024), the 32.5% and 37% tax brackets are removed and replaced with a larger 30% tax bracket for anyone earning $45,000 to $200,000. Here’s what these Stage 3 tax changes will mean for various income levels:
- $45,000 salary: $0 per year
- $90,000 salary: $1,125 per year
- $200,000 salary: $3,875 per year
Below is the Tax Cut Plan:
|Tax Rate||Current (2019-2020)||Stage 2 -2020-2021||Stage 3 – 2024-2025|
|0%||$0 – $18,200||$0 – $18,200||$0 – $18,200|
|19%||$18,201 – $37,000||$18,201 – $45,000||$18,201 – $45,000|
|30%||–||–||$45,001 – $200,000|
|32.5%||$37,001 – $90,000||$45,001 – $120,000||–|
|37%||$90,000 – $180,000||$120,000 – $180,000||–|
|45%||$180,001 and above||$180,001 and above||$200,001 and above|
You can find information about Australian tax brackets here.
Is there anything I have to do to be eligible for the cuts?
Your employer’s payroll software will take care of everything. The only changes you can expect this year is an increase in their take home pay each week and hopefully a nice tax refund boost come tax time!