Tax Cuts – where it fits for you

Tax Cuts – where it fits for you

From July next year, most tax payers will be getting a bonus of $530 a year, which should help many Australians with rising energy bills in an economy starved of wage growth.

The benefits will initially be small – but proportionally higher for low income earners – and will grow by 2028 to be twice the size of the next largest tax cut in Australian history.

By 2022 many taxpayers will get a tax cut worth $1000 a year.

As a reminder, these are the current tax bands and rates:

Taxable Income Tax Payable (excl. Medicare Levy of 2%)
$0 – $18,200 Nil
$18,201 – $37,000 19%
$37,001 – 87,000 32.5%
$87,001 – 180,000 37%
$180,001 + 45%

 

So who wins?

Only workers earning more than $87,000 will benefit immediately – about $135 a year on average – when the 32.5% tax threshold is lifted to $90,000 from July 1, 2018 (currently $87,000).

This is the first step in eliminating the 37% bracket altogether ($87 – 180,000 income range). Eventually – by 2028 – 90% of workers will only pay 32.5¢ for every dollar earned between $40,000 and $200,000.

How generous it will be for you depends on how much you make each year. As a rule, the more tax you pay the larger the cut you will receive.

To sweeten up the flat tax system for workers on lower incomes, the government has introduced a low-medium tax offset [‘LMTO’].

What do low-medium income earners get?

From July next year (2019), Australians who earn up to $125,333 will get up to $530 cash-back when they lodge their tax return. Note that is a rebate / refund when you lodge your tax return. It won’t change your payroll PAYG tax deduction. So the quicker you lodge your income tax return, the quicker you’ll see the refund.

This will last until July 2022, when workers earning up to $66,667 will get $645 back each year (enough to cover car insurance on a 2014 Toyota Corolla in most places except Sydney).

The majority of workers will also benefit from the upper threshold for the 19% marginal tax rate band rising from $37,000 to $41,000 from July 1, 2022, when the 32.5% marginal tax rate band also increases from $90,000 to $120,000.

That year will see middle to high income earners benefit the most in dollar terms, with workers earning up to $120,000 taking home $2025 extra. A real change in tax paid.

High earners are the only beneficiaries of the final piece of the puzzle in 2024, when the 45% marginal tax rate band increases from $180,001 to $200,000.

So what will it actually look like in the end, which is in 2028? Here’s our table again:

Taxable Income Tax Payable (excl. Medicare Levy of 2%)
$0 – $18,200 Nil
$18,201 – $41,000 19%
$41,001 – 200,000 32.5%
$200,001 + 45%

 

Tax reform

Flattening the tax rate to 32.5% for the majority of workers was an indicative recommendation of the Henry tax review (remember that way back in 2010?). The logic goes that a flatter tax rate encourages people to take on more hours without punishing them by pushing their incomes into a higher tax bracket.

But the review also recommended pushing up the tax-free threshold to $25,000 from the current rate of $18,200.

Instead of doing this – which would provide significant benefits to low income earners – the government has opted to implement two tax offsets. Almost same outcome, except the rebate comes when you lodge your tax return, rather than a tax cut which reduces your PAYG tax taken from your wage month-to-month.

This does put money in the pockets of workers struggling with low (or no) wage growth, but also complicates a tax system due to its transitional nature over the next 10 years. The long-term outcome being a simplified tax scale.

In the interim, it’s an easy fix: we’ll simply publish the tax rates each year for you.

If you have any questions on the new tax rates, or would like an estimate of how this will benefit you, please do not hesitate to contact us.