The Budget has brought forward the Government’s Personal Income Tax Plan, implementing further personal tax cuts for low to middle income earners. The Government also announced measures exempting granny flat arrangements from capital gains tax, tax exempt treatment for recipients of disaster recovery and volunteer firefighter payments, as well as an increase to the Medicare Levy for low-income thresholds for singles, families, seniors and pensioners.

Bringing forward the Personal Income Tax Plan

The Government will bring forward the second stage of its Personal Income Tax Plan by two years to 1 July 2020. As a result:

• The top threshold of the 19% personal income tax bracket will increase from $37,000 to $45,000;
• The low income tax offset (LITO) will increase from $445 to $700. The increased LITO will be withdrawn at a rate of 5 cents per dollar between taxable incomes of $37,500 and $45,000. The LITO will then be withdrawn at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667; and
• The top threshold of the 32.5% personal income tax bracket will increase from $90,000 to $120,000.

These changes will reduce the amount of tax withheld through pay-as-you-go withholding obligations, which means that the tax relief will flow faster to individuals in their regular pay packets.

Stage 3 of the Personal Income Tax Plan remains unchanged and will commence in 2024-25 as legislated.

Retaining the low and middle income tax offset (LMITO)

The Government will retain the LMITO for the 2020-21 income year, providing further targeted tax relief for low- and middle-income earners.

The LMITO provides a reduction in tax of up to $1,080. It provides a reduction in tax of up to $255 for taxpayers with a taxable income of $37,000 or less. Between taxable incomes of $37,000 and $48,000, the value of the offset increases at a rate of 7.5 cents per dollar to the maximum offset of $1,080. Taxpayers with taxable incomes between $48,000 and $90,000 are eligible for the maximum offset of $1,080. For taxable incomes of $90,000 to $126,000, the LMITO phases out at a rate of 3 cents per dollar. Consistent with current arrangements, the LMITO will be received on assessment after individuals lodge their tax returns for the 2020-21 income year.

Exempting granny flat arrangements from capital gains tax (CGT)

The Government will provide a targeted CGT exemption for granny flat arrangements. Under the measure, CGT will not apply to the creation, variation or termination of a formal written granny flat arrangement providing accommodation for older Australians or people with disabilities. This change will only apply to agreements that are entered into because of family relationships or other personal ties and will not apply to commercial rental arrangements.

The measure will commence as early as 1 July 2021, subject to the passing of legislation.

Tax treatment of disaster recovery and volunteer firefighter payments

The Government has made relief and recovery payments and benefits, as well as support payments to volunteer firefighters, provided by Australian governments in relation to the 2019-20 bushfires free from tax. The measure applies to the 2019-20 income year and later income years.

This measure ensures relief and recovery payments made by the Commonwealth, state, territory and local governments for the purpose of providing relief or assisting in the recovery efforts of entities and individuals affected by the 2019-20 bushfires are free from income tax. Examples of payments covered by this measure include the Disaster Recovery Allowance and payments made by state and territory governments under the Disaster Recovery Funding Arrangements.

Additionally, it ensures the payments made to eligible volunteer firefighters, to compensate them for loss of income as a result of volunteering, are free from tax.

Medicare Levy

The Government has increased the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2019-20 income year. The increases take account of recent movements in the consumer price index so that low-income taxpayers generally continue to be exempted from paying the Medicare levy.

The changes to the Medicare Levy will operate as follows:

• The threshold for singles has increased from $22,398 to $22,801;
• The family threshold has increased from $37,794 to $38,474;
• For single seniors and pensioners, the threshold has increased from $35,418 to $36,056;
• The family threshold for seniors and pensioners has increased from $49,304 to $50,191; and
• For each dependent child or student, the family income thresholds increase by a further $3,533, instead of the previous amount of $3,471.