Income Tax Cuts Calculator - Australia Federal Budget 2020/21

In November 2020, more than 11.6 million Australians should experience the first benefits of new income tax cuts. They were decided on 9^th October, when Parliament voted on one of the most important Federal Budgets in decades: Australia is going to face a budget deficit of around $281.4 billion, the highest since World War II, and the first recession in nearly 30 years. One element of the Government's plan to tackle this situation is to bring forward Stage 2 of the Personal Income Tax Plan to take effect from July 1, 2020 - two years earlier than originally planned. Now, employers have until 16^th November to adjust their payroll.

Many factors impacting how much income tax you pay will change: tax rates, thresholds, tax offsets, etc. That's why we've prepared this income tax cuts calculator - now you can quickly find out how much you're going to save over the next several years. We hope it will help you better plan your budget. Do you already know what you're going to spend the extra money on? 🤑

The Personal Income Tax Plan, announced on 8^th May 2018, is a seven-year plan of income tax cuts. This plan is designed to lower the income tax for the vast majority of Australians. It has three stages: Stage 1 came into force back in 2018/19, and Stage 3 is planned for 2024/25 onwards. Stage 2 was initially scheduled for 2022/23, but the government announced that they were to bring it forward two years - to the coming financial year 2020/21.

The main ingredient of the Personal Income Tax Plan is to change the marginal tax rates and their respective thresholds. Also, the government plans to make some changes to tax offsets. As there are many factors, finding out how much you can save thanks to this plan can be quite challenging - for details, click here. That's why our income tax cuts calculator is here for you! In the next section, we explain how to use it.

Are you interested in other financial calculators? Our time and a half calculator will help you to calculate your monthly earnings using your basic salary and your overtime pay.

1. Choose who you want to calculate the tax savings for:

   • one person; or
   • a couple.

   In each case, you then need to enter data on taxable income. In the case of a couple, you must enter any two of the following: your taxable income, your spouse's taxable income, or your joint taxable income. If you're not sure what taxable income is, see the explanation below.

2. Our income tax cuts calculator shows your income tax savings over the next five years as well as their sum and average per year.

3. The income tax cuts calculator plots your income tax between 2017/18 (the year before the government's plan kicked in) up to 2024/25 (when the final part, Stage 3, of the plan should come into effect) so that you can see the total impact of the whole plan on your income tax.

4. Two more plots are available. With their help, you can see:

   • How much you would have to pay if it were not for tax offsets; and
   • What tax rate applies to you.

5. Change the mode from summary to details to see detailed calculations of all the ingredients of your tax:

   • What tax rate applies to you;
   • What is your income tax before offsets;
   • How much LITO and LMITO you get; and
   • What is your final tax payable.

If you are not familiar with any of the terms mentioned above, check the following sections. First, we explain basic rules for calculating income tax and then provide details of the changes due to the Personal Income Tax Plan.

To find the amount of income tax you owe, you need to follow these three steps:

1. Determine your taxable income based on your assessable income and the tax deductions you're eligible for.
2. Calculate the tax payable based on your taxable income and the table of marginal tax rates in effect for a given year.
3. Correct the tax payable by tax offsets available to you.

We will now go through all these financial notions one-by-one.

What is your assessable income?

Assessable income mostly consists of the income you receive for work:

• Salary and wages (compute with the hourly to salary calculator);
• Bonuses and awards; and
• Tips.

However, other sources of income also count! For instance:

• Parental leave pay;
• Sickness or accident payments;
• Annuities, interest rates & dividend calculations; and
• Crowdfunding income etc.

What deductions are you allowed?

Not all of your assessable income is taxed. You may be eligible for some tax deductions, which reduce the amount of your income that is going to be taxed. The most common deductions are work-related expenses, for instance:

• Vehicle expenses;
• Home office expenses;
• Internet & cell phone plan expenses; and
• Clothing, laundry or tools/equipment expenses, etc.

There are lots of other deductions as well. For example, charitable donations can be deducted from your assessable income too! For more details, check the government website on tax deductions.

What is your taxable income and tax payable?

Taxable income is the part of your assessable income that is taxed. The formula is very straightforward: taxable income is assessable income minus all deductions you are eligible for.

Tax payable is the amount of tax you're due, based on your taxable income and tax rates. The good news is that tax offsets can decrease the amount of tax payable!

What offsets are you eligible for?

Tax offsets are subtracted from your tax payable to determine the final amount of income tax you have to pay. It may even happen that they bring your income tax all the way down to $0! There are several tax offsets available. The two related to the Personal Income Tax Plan are LITO and LMITO:

• LITO is Low Income Tax Offset. The full amount of $700 is available for people earning up to $37,000, while those who earn less than $66,667 may receive some part of LITO.

• LMITO is Low and Middle Income Tax Offset. It is a temporary offset and 2020/21 is the last year LMITO is available. People with annual taxable income between $48,000 and $90,000 get the full amount of $1,080; those who earn up $126,000 get some part of LMITO.

There are some rules you should know about these tax offsets:

1. The effects of LITO and LMITO accumulate!

2. If you're entitled to any of these offsets, the Australian Taxation Office (ATO) will apply them automatically - you don't need to do anything.

3. LITO and LMITO are non-refundable tax offsets: they lower the tax you're due but can't be turned into a tax refund (if your tax payable were to fall beneath $0 because of LITO or LMITO, you wouldn't receive any cash). Also, they can't be used to cover your Medicare levy.

What about couples? 👩‍❤️‍👨

In Australia each individual is taxed separately - there's no special rules for married couples as in some other countries. The joint income tax payed by a couple is simply the sum of their individual taxes.

Here we present to you how the Personal Income Tax Plan will affect tax rates and thresholds. Tax offsets are discussed in the next section.

In summary:

• In Stage 2 (2020/21 onwards), income thresholds for 19%, 32.5%, and 37% rates will increase; and
• In Stage 3 (2024/25 onwards), the 32.5% and 37% rates will be replaced by a 30% rate. In addition, the income threshold for the highest (45%) rate will increase.

Here's a table summarizing the rate and threshold changes:

Overview of tax rate changes

⚠️ Be careful to read the above table correctly! It shows marginal tax rates: tax rates paid on portions of your income exceeding the respective thresholds. That means that if your taxable income is $30,000, then only its portion exceeding $18,200 is subject to the 19% tax rate. In other words, you will pay 19% × ($30,000 - $18,200) = $2,242.

✔️ To make life easier, we attach two more tables to help you quickly determine your income tax by hand, should you ever need to do this. Using these tables, you only need to find the row describing your taxable income and then perform the calculation in the right column. And don't forget that offsets can then lower the amount of tax you owe!

Tax rates 2020/21 - 2023/24

Tax rates 2024/25 onwards

In general, LITO rises to $700 (it was $455 in Stage 1) and LMITO stays in effect for one more financial year 2020/21. Here are the details:

LMITO (available 2018/19 - 2020/21)

LITO from 2020/21 onwards

1. Taxable income of $35,000:

   • Tax before offsets: 19% × ($35,000 - $18,200) = $3,192
   • LITO: $700
   • LMITO: $255
   • Total tax offset: $700 + $255 = $1,155
   • Income tax due: $3,192 - $1,155 = $2,237

2. Taxable income of $60,000:

   • Tax before offsets: $5,092 + 32.5% × ($60,000 - $45,000) = $9,967

   • LITO: $325 - 1.5% × ($60,000 - $45,000) = $100

   • LMITO: $1,080

   • Total tax offset: $300 + $855 = $1,180

   • Income tax due: $9,967 - $1,180 = $8,787

3. Taxable income of $125,000:

   • Tax before offsets: $29,467 + 37% × ($125,000 - $120,000) = $31,317
   • LITO: you're entitled to
   • LMITO: $1,080 - 3% × ($125,000 - $90,000) = $30
   • Total tax offset: $30
   • Income tax due: $31,317 - $30 = $31,287