FY 2021 New Tax Tables
By Paolo Coniglio, 11.10.2020
As announced during the Federal Budget, the Australian Government has brought forward stage 2 of its planned Income Tax Rate cuts, originally scheduled for the 1st July 2022. This is another step in the Government’s plan to continue to support both individuals and businesses as a result of the COVID-19 Pandemic.
The Federal Budget Tax Bill passed through both houses of Parliament Friday 9th October. The new 2020-2021 personal income tax thresholds have been incorporated into the withholding schedules and are now available on the ATO website for download.
The updated tax tables apply to payments made from 13th October 2020. Employers have been given until 16th November 2020 to implement these changes in their Payroll systems. However, the new tax tables’ effective date is 1st July 2020.
Whilst the tax rate cuts have been back-dated, there will be no requirements for employers to adjust any excess tax withheld on wages prior to October 2020. Individuals taxpayers will receive a credit of any excess amounts withheld when they lodge their 2021 income tax return.
The Government estimates this measure will provide tax relief of approximately $12.5 billion over the next 12 months, boost GDP by around $3.5 billion in 2020-21 and $9 billion in 2021-22. The Australian Government also hopes these cuts will help create an additional 50,000 jobs by the end of 2021-22.
New Tax Tables 2021
More than 11 million Australians are set to receive a tax cut in their pay, ranging from $47 a week for high-income earners to a one-off $21 cut for middle-income earners.
The cuts increase the upper threshold of the 19% tax bracket from $37,000 to $45,000, and the upper threshold of the 32.5% tax bracket from $90,000 to $120,000.
The most notable change is the increased threshold applied to the 37% marginal tax rate from $80,000 to $87,000.
Both low and middle-income taxpayers* will receive up to $2,745 annual tax relief.
- Income earners up to $40,000 Annual Salaries will receive 21% tax relief;
- Income earners up to $60,000 Annual Salaries will receive 17% tax relief;
- Income earners up to $80,000 Annual Salaries will receive 11% tax relief;
- Income earners up to $160,000 Annual Salaries will receive 5% tax relief.
Further tax savings have also been provided to low-income earners through an increase to the Low Income Tax Offset from $445 to $700. The current LMITO (Low and Middle Income Tax Offset) of up to $1,080 for individuals with a taxable income of up to $126,000 will also remain in place for 2020-21.
The next stage of the Tax Cut Plan is currently scheduled for FY 2025 and is set to provide additional tax relief, particularly to low-income earners.
* The above tax cuts do not apply to Working Holiday Makers.
Australian Government Tax Cut Plan
Tax Tables Software Roll Over Dates
The Australian Taxation Office has announced that as the changes have been made partway through the income year, employers and other payers who are unable to immediately implement the tax cut changes will have until 16 November 2020 to do so.
Software providers will be updating their withholding schedules in due course, however, it is possible to manually calculate the tax to be deducted from an employee’s pay using the ATO withholding schedules before that occurs.
As employers seek to pay their workers the accurate amount, payroll providers are working to have their products updated with the correct tax tables implemented.
“As such, some employees may notice the tax cuts reflected in their take-home pay within a few days or weeks, while for others it may be longer. Any withholding on the old scales will be taken into account in the employee’s tax return” the ATO confirmed.
Update Tax Tables in your Payroll Software
As the new 2020-2021 personal income tax thresholds have been introduced partway through the income year and with very little notice, employers unable to implement these changes right away have been given until the 16th November 2020.
Employers have to wait for the Software Companies to update their Payroll solutions before implementing these changes. There is no requirement of making manual adjustments to the tax tables until the 16th of November.
At this stage, most of the major small business Accounting Software Companies have not committed to a specific rollover date. However, they have all assured their Clients the new Tax Tables will be implemented by the November deadline.
So what would employers need to do once their Payroll software solution is updated? This depends on the software.
Xero and MYOB Essentials
As these are 100% cloud-based solutions, tax tables will automatically update and roll over to Payroll. Users will not have to make any manual updates to their Software Settings.
MYOB announced that the new tax tables will be updated as a patch of their latest version 2020.3, this will be 2020.3.1.
MYOB AccountRight Online Users
Only one computer will need to update the patch, tax tables will then roll over into the Company File.
As per the 2020.2 compliance update, the requirement of manually upload the Tax Tables has now been removed.
Any users currently on previous versions (2020.2) will need to fully update their software to 2020.3.1 and install it on all Desktop computers.
MYOB AccountRight Desktop and Server Users
Users on 2020.3 will need to install the patch update on one computer tax tables will then roll over into the Company File.
Users on previous versions (2020.2) will need to install the new version on both the Server and other Desktop computers.
These new versions will be available on the my.MYOB website for download.
Quickbooks Online & KeyPay
New Tax Tables have already been implemented. Similarly to Xero and MYOB Essentials, as these are 100% Cloud-based solutions, users do not need to process any manual updates
Tips for Employers
While waiting for the new Tax Tables to be rolled over, employers should prepare themselves for these new changes:
- Communicate with employees
Email employees to let them know about these changes, and how they will positively affect their pays. You may also want to check if their Award is part of the second stage of update pay rates starting from 1st November. This may cause their net pay to change twice within a short period of time.
- Keep an eye for Software Updates
This is particularly important if using MYOB AccountRight. Ensure to keep an eye on the forthcoming compliance update and update the software as soon as the new version is available.
- Update recurring wages bank transfers
Any regular wages bank transfers should be stopped and update them with the new amounts once the new Tax Tables (and Fair Work pay increases) are applied to Payroll. Also, consider speaking to your Bank about starting to pay employees using Batch Payments (aba files)
This blog and attached resources are of general nature designed for informational and educational purposes only. They should not be construed as professional financial advice for your individual business. Should you need such advice, consult a licensed financial or tax advisor.