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Income Tax & the Budget

The 2018 Budget initiated long-term plans to simplify Australia's tax system, with Treasurer Scott Morrison pledging $140 billion in personal income tax relief over the next decade. The ambitious seven-year program put forth by the Liberal Party will have a huge influence on the next Federal election, with the entire plan set to last for three election cycles. Along with winding back taxation thresholds, the Government are also planning to scrap the 37 percent tax rate by 2024, along with measures that combat bracket creep.

Australia currently has five tax brackets, with people starting to pay tax when they earn more than $18,200 per year. Phase one of the plan is directed towards low and middle income earners, with a four-year Low and Middle Income Tax Offset (LMITO) received at the end of the year as part of the regular tax refund. The only bracket change in this phase will see the 37 percent tax threshold that currently sits at $87,000 increasing to $90,000. People who earn up to $37,000 will see their tax bill reduced by $200 in phase one, with the maximum offset of $530 affecting those earning between $48,000 and $90,000.

Phase two will start in 2022, when the 32.5 percent tax bracket will be lifted from $37,000 to $41,000, and the 37 percent bracket will be lifted from $90,000 to $120,000. While this will do nothing for low-income earners, it will have a positive effect on upper-middle and high-income earners. Phase three is the most ambitious part of the plan, with the 37 percent tax bracket removed entirely. Once again, this will only affect upper-middle and high-income earners, with a single tax bracket of 32.5 percent affecting all income between $41,000 and $200,000.

According to Mr Morrison, “Under the Turnbull government’s personal income tax plan, most working Australians earning above $41,000 are likely to never face a higher marginal tax rate through their entire working life... This is not a spending give-away. We are simply enabling Australians to keep more of what they have earned. This plan is affordable and funded. Under our personal tax plan, 94 per cent of Australian taxpayers will pay no more than 32.5 cents in the dollar. That compares to 63 per cent if we leave the system unchanged."

If they are implemented and the Government manages to stay in office, these tax cuts will cost $13.4 billion over the next four years. The long-term impact of these changes will be much more significant, however, with Finance Minister Mathias Cormann saying that he expects the income tax reforms to cost a whopping $140 billion in lost revenue over the next 10 years. Along with tax reform, the budget’s economic stimulus policy will see an extra $24.5 billion spent on infrastructure projects across the country, including major road and rail projects in the capital cities.


Image source:  Andrey_Popov/Shutterstock

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