Commencement, application, and transitional provisions
Schedule 2 to the Bill commences on the day after the Bill receives Royal Assent.
[item 5 of the commencement table in clause 2 of the Bill]
The amendments in Schedule 2 to the Bill apply to net rental losses incurred in the 2027-28 income year and later income years in relation to interests in residential dwellings acquired on or after 7.30pm (AEST) on 12 May 2026, unless otherwise excluded. The effect of this application provision is that owners of all residential dwellings acquired under binding contacts entered into, from the time of the Budget announcement until 30 June 2027 can fully deduct losses for the income year ending on 30 June 2027 only. However, such net losses must be quarantined from 1 July 2027.
[Schedule 2 to the Bill, item 1, paragraph 26-155(2)(a) of the ITAA 1997; item 5]
Working Australians tax offset
Table of Contents:
Outline of chapter 89
Context of amendments 89
Summary of new law 90
Comparison of key features of new law and current law 90
Detailed explanation of new law 90
Consequential amendments 93
Commencement, application, and transitional provisions 93
Outline of chapter
Schedule 3 to the Bill amends the ITAA 1997 to introduce a new non‑refundable tax offset, named the working Australians tax offset (WATO), for Australian resident individuals who earn labour income. The WATO applies for the 2027-28 income year and subsequent income years.
Context of amendments
The income tax law provides a range of tax offsets that reduce the amount of income tax otherwise payable by eligible taxpayers. Many of the offsets are contained in Division 61 of the ITAA 1997.
Existing offsets are generally not targeted specifically to labour income. For example, the low income tax offset is based on taxable income and does not distinguish between income derived from labour and income derived from capital or savings. As a result, there is not currently any mechanism to provide broad-based tax relief targeted specifically to workers.
The WATO addresses this by providing targeted relief to Australian resident individuals who earn labour income for the 2027-28 income year and subsequent income years.
Summary of new law
Schedule 3 to the Bill amends the tax law to introduce a WATO into the ITAA 1997 to reduce the tax burden for Australian resident individuals whose labour income (reduced by labour deductions) is above the tax-free threshold for the 2027-28 income year and future income years.
Comparison of key features of new law and current law
Section retrieval-0012 - Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026 - Document excerpt 12 | Zoe
Comparison of new law and current law
New law
Current law
An individual is entitled to the WATO, a non-refundable tax offset, if they are an Australian resident (at any time during the income year) and their net labour income exceeds the tax-free threshold.
There is no equivalent tax offset in the current law.
The maximum amount of the WATO is $250. Where income tax on a taxpayer’s labour income is less than $250, the amount of the offset may be reduced to reflect the income tax which would otherwise be payable. The formula for this calculation, based on net labour income, will be determined by the Minister by legislative instrument.
There is no equivalent tax offset in the current law.
Detailed explanation of new law
Schedule 3 to the Bill amends the ITAA 1997 to introduce a new tax offset for working Australians.
The WATO
The WATO is a non-refundable tax offset available for the 2027-28 income years and subsequent income years.
Individuals will be entitled to this new offset for an income year if:
during that income year they are an Australian resident individual; and
their net labour income exceeds the tax-free threshold within the meaning of the Income Tax Rates Act 1986.[Schedule 3, item 1, section 61-150 and subsection 61-155(1) of the ITAA 1997]
The WATO is intended to provide relief to working Australians. The amount of the WATO available to an individual depends on their net labour income for the income year. The WATO is not available to individuals whose net labour income does not exceed the tax-free threshold.
Amount of the WATO
The WATO provides a maximum benefit of $250 to eligible individuals. Individuals with income tax payable above $250 on their net labour income will be entitled to the full amount of the WATO.
A determination made by the Minister by legislative instrument may define the method for calculating the amount of the offset to which an individual may be entitled based on the amount of their net labour income for an income year or the basic income tax payable on their net labour income. This may provide for calculation of the amount of WATO when the amount of tax payable on net labour income is less than $250. This aligns with the approach to other offsets in the income tax system, such as the Seniors and Pensioners Tax Offset.[Schedule 3, item 1, section 61-160 of the ITAA 1997]
The delegation of legislative power is appropriate because it provides the Minister with the ability to prescribe methods for calculating an amount of offset up to and including $250, as to provide targeted relief to Australian workers in relation to the amount of income tax payable on their net labour income, and adjustable to reflect ongoing refinements to the tax system which affect the tax payable on net labour income.
The legislative instrument is subject to disallowance and sunsetting under the Legislation Act 2003 and will be subject to appropriate parliamentary oversight and scrutiny.
Net labour income
An individual’s net labour income used to determine their eligibility and the amount of the WATO is calculated as labour amounts less labour deductions for an income year.
The meaning of labour amounts captures the types of assessable income that have the character of labour income under the income tax law. Labour amounts is the sum of the following amounts included in an individual’s assessable income for an income year:
an amount of assessable labour income as defined in subsection 25‑130(4) of the ITAA 1997 as proposed in Schedule 4 to the Bill (being assessable income from work‑related activities covered by the standard deduction);
an amount derived from carrying on a business as a sole trader;
an amount of personal services income within the meaning of subsection 84-5 of the ITAA 1997;
the discount amount of an employee share scheme interest under section 83A-25 of the ITAA 1997; and
a payment from which an amount must be withheld (even if the amount is not withheld) under section 12-60 in Schedule 1 to the TAA 1953 (being payments made under labour hire arrangements to individuals in the course of an enterprise).
The meaning of labour deductions captures deductions under the income tax law that relate to the gaining or producing of labour income. Labour deductions is the sum of the following in an income year:
a loss or outgoing incurred in gaining or producing an amount of assessable labour income or personal services income;
a loss or outgoing incurred in carrying on business as a sole trader;
an amount that can be deducted under section 25-130 of the ITAA 1997 as proposed in Schedule 4 to the Bill (being the amount of an individuals’ standard deduction);
the decline in value of depreciating assets under section 40-25 of the ITAA 1997 (other than the decline in value for depreciating assets that have been allocated to a low value pool under section 40-425) to the extent the deduction arises in respect of the depreciating asset used in deriving assessable income from carrying on a business as a sole trader or gaining or producing an amount of personal services income;
an amount of deduction that is mentioned in paragraphs 25-130(2)(d) to (g) of the ITAA 1997 as proposed in Schedule 4 to the Bill (relating to specified categories of work‑related expense deductions covered by standard deduction); and
an amount that can be deducted under subdivision 328-D of the ITAA 1997 to the extent the deduction arises in respect of deriving assessable income from carrying on a business as sole trader (being deductions for depreciating assets for small business entities).
[Schedule 3, item 1, subsection 61-155(2) of the ITAA 1997]
If an amount is covered under more than one paragraph of the meaning of labour amounts or labour deductions, the amount is only included once in the calculation of net labour income under subsection 61-155(2) of the ITAA 1997.[Schedule 3, item 1, subsection 61-155(3) of the ITAA 1997]
Priority and refund status
The WATO is subject to specific priority and is applied immediately prior to other tax offsets covered in the table in subsection 63-10(1) of the ITAA 1997. The WATO is a non-refundable tax offset and cannot be transferred or carried forward. The amendments provide for the order in which the WATO is applied relative to other tax offsets when calculating an individual’s tax liability. This priority ensures that the WATO interacts appropriately with other offsets within the broader tax system. As with other non-refundable offsets, any excess amount remaining after applying the WATO is not refundable and is extinguished.[Schedule 3, item 2, subsection 63-10(1) of the ITAA 1997 (table item 3)]
It is not expected that the WATO will be taken into account in the administration of PAYG withholding schedules under section 15-25 in Schedule 1 to the TAA 1953, consistent with the Commissioner of Taxation’s general approach to non-refundable tax offsets.
Consequential amendments
Consequential amendments are made to the ITAA 1997 to incorporate the WATO into the income tax law. These amendments include inserting a reference to labour income in section 13-1, signposting Subdivision 61-E. [Schedule 3, item 3, section 13-1 of the ITAA 1997 (table item headed “labour income”]
Commencement, application, and transitional provisions
Schedule 3 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October after the Act receives Royal Assent.[item 6 of the commencement table in clause 2 of the Bill]
The amendments made by Schedule 3 apply in relation to assessments for the 2027-28 income year and subsequent income years.[Schedule 3, item 4]
Standard deduction for work-related expenses
Table of Contents:
Outline of chapter 95
Context of amendments 95
Summary of new law 96
Detailed explanation of new law 97
Standard deduction replaces certain substantiation provisions 105
Commencement, application, and transitional provisions 106
Outline of chapter
Schedule 4 to the Bill amends the ITAA 1997 to introduce a $1,000 standard deduction for the 2026-27 income year and later years for work-related expenses for individuals who are Australian tax residents who derive assessable labour income.
Schedule 4 to the Bill also amends existing substantiation, capital allowance and capital gains tax rules, and includes integrity rules in the FBTAA to avoid misuse of the standard deduction to obtain a double benefit.
Context of amendments
The $1,000 instant tax deduction aims to provide permanent cost of living relief, helping Australians keep more of what they earn. This tax reform aims to cut red tape and make tax time quicker and easier for individual taxpayers.
Under the current income tax law, individual taxpayers who earn labour income must itemise and substantiate their work-related deductions.
The amendments provide a standard deduction of up to $1,000 for an income year for work-related expenses for individuals who are Australian tax residents and derive assessable labour income. The standard deduction is intended to operate as a compliance saving measure so that taxpayers can rely on receiving a standard amount without requiring substantiation. Taxpayers with more than $1,000 in genuine work-related expenses may continue to itemise and substantiate their claims and their standard deduction is reduced to zero.
Summary of new law
Schedule 4 to the Bill introduces a new specific deduction into the ITAA 1997 that allows individuals who are Australian tax residents to claim a standard deduction for work‑related expenses each income year of the lesser of $1,000 and their total assessable labour income. The standard deduction is reduced, dollar-for-dollar, by general and specified work-related expense deductions claimed (including certain transport, car, repair, capital allowance and COVID-19 test deductions) so that taxpayers do not receive a double benefit, while deductions such as income protection type insurance premiums and union or other trade, business or professional association memberships, and deductions not related to assessable labour income, remain unaffected.
Schedule 4 to the Bill aligns existing substantiation and capital allowance rules with the new standard deduction by removing small amount substantiation concessions for work-related expenses, repealing related provisions and definitions, and updating the transport expense rules. The amendments prevent new depreciating assets that are mainly used to produce assessable labour income from being allocated to a low-value pool. It also introduces an optional fixed-reduction method for calculating balancing adjustments and capital gains or losses for depreciating assets used to derive assessable labour income where the taxpayer has relied on the standard deduction, instead of retaining records of how much they used the asset for certain purposes.
Schedule 4 to the Bill amends the FBTAA so that the:
‘otherwise deductible’ rule does not apply to expense payment fringe benefits for work-related expenses covered by the standard deduction and provided under a salary packaging arrangement; and
FBT exemption for eligible work related items is limited to benefits that have not been provided under a salary packaging arrangement and is no longer limited to substantially identical items.
The amendments to the FBTAA ensure the standard deduction cannot be combined with salary packaging arrangements entered into by an employee with their employer that could result in a double tax benefit being received.
All legislative references are to the ITAA 1997, unless otherwise specified.
Detailed explanation of new law
To simplify the tax system for individuals who are Australian tax residents, a $1,000 standard deduction is introduced to cover work-related expenses. A taxpayer is not required to incur or substantiate work-related expenses to claim the standard deduction. [Schedule 4, items 1 and 3, section 12-5 and subsection 25-130(1) of the ITAA 1997]
Expenses the standard deduction covers
Introducing the $1,000 standard deduction is intended to simplify the process for taxpayers deducting work-related expenses. To ensure that the standard deduction for an income year only covers work-related expenses once, and taxpayers cannot effectively claim the same deduction more than once, the standard deduction covers any of the following deductions in the income year:
general deductions for a loss or outgoing that is incurred in gaining or producing assessable labour income;
deductions for car expenses to the extent that the deduction arises in respect of gaining or producing assessable labour income under Division 28;
deductions relating to transport expenses for travel between workplaces under section 25-100 to the extent that the taxpayer was engaged in activities to gain or produce assessable labour income at either of the workplaces;
capital allowances deductions (deductions for the decline in value of depreciating assets) to the extent the asset is used for the purpose of gaining or producing assessable labour income;
balancing adjustment deductions under subsection 40-285(2) to the extent the asset was used for the purpose of gaining or producing assessable labour income;
deductions relating to repairs to premises or a depreciating asset under section 25-10 to the extent the underlying asset is used in producing assessable labour income; and
deductions relating to a loss or outgoing for COVID-19 tests under section 25-125.
[Schedule 4, item 3, subsection 25‑130(2) of the ITAA 1997]
The amount of the standard deduction is the lesser of $1,000 or the total amount of assessable labour income produced in an income year. If the combined total of work-related expenses claimed by the individual is less than the amount of the standard deduction, the standard deduction operates so that the amount of work-related expenses reduces the standard deduction.
The introduction of the standard deduction has the result that, in practice, taxpayers seeking the benefit of deductions can choose whether to itemise (or claim) those deductions in their tax return. If a taxpayer decides to itemise their deductions and the deductions are covered by the standard deduction and are less than their standard deduction entitlement (being the lesser of $1,000 and the taxpayer’s assessable labour income), the taxpayer will receive a standard deduction amount, that when combined with their itemised deductions, is equal to their standard deduction entitlement.
On the other hand, if an individual’s total amount of deductions covered by the standard deduction exceeds their standard deduction entitlement and they choose to itemise those deductions, the taxpayer will not receive any standard deduction and will instead receive deductions equal to the total amount of their work-related expenses that have been incurred for the income year.
Where a taxpayer chooses not to itemise their deductions that are covered by the standard deduction and those deductions would otherwise exceed their standard deduction entitlement, the taxpayer will instead receive their standard deduction entitlement.