• Individuals, Tax Cuts and Superannuation

Will tax cuts be seen as incentive or insult?

In a move to attract swinging voters, the Budget has revealed a seven-year personal income tax cut plan commencing 1 July 2018.

The Budget measure addresses tax pressure in three steps:

  • Immediate tax relief for low to middle income earners to ease cost of living pressures
  • Protection from bracket creep
  • Wide ranging personal tax savings.

Immediate effects

The provision of immediate tax relief will be delivered in the form of a new Low and Middle Income Tax Offset (capped to $530 per annum).

The new Income Tax Offset will provide a benefit of up to $200 per year for taxpayers earning under $37,000, and up to $530 for those earning between $48,000 and $90,000 per annum.
From $90,000, the new offset will phase out at 1.5c per dollar (until $125,333 per year).

These measures will commence from 1 July 2018 and run until 30 June 2022.

Protection from bracket creep

The second step of the seven-year Budget plan is to protect taxpayers, particularly those in the middle income tax brackets, from the effects of bracket creep.

The first line of defence will be the increase of the 32.5% tax rate threshold from $87,000 to $90,000, commencing 1 July 2018.

This will be bolstered by a further increase from $90,000 to $120,000 from 1 July 2022. The threshold for the 19% tax rate will also increase from $37,000 to $41,000 from this date, as illustrated in the table below:

Tax rates and thresholds
Rate Current 2018-19 to 2021-22 2022-23 and 2023-24
0% $0 - $18,200 $0 - $18,200 $0 - $18,200
19% $18,201 - 37,000 $18,201 - 37,000 $18,201 - 41,000
32.5% $37,001 – 87,000 $37,001 - 90,000 $41,001 - 120,000
37% $87,001 - $180,000 $90,001 - $180,000 $120,001 - $180,000
45% $180,001+ $180,001+ $180,001+

The above threshold increases will be further reinforced by an increase to the Low Income Tax Offset (LITO) from $445 to $645 from 1 July 2022.

Wide ranging tax cuts

The final step in the Budget plan is the introduction of personal tax cuts for the majority of the taxpayer population delivered in the form of an abolition of the 37% tax rate bracket and increase in the top marginal rate threshold from 1 July 2024.  
This  means that taxpayers would enjoy a tax rate of 32.5% on income from $41,000 to $200,000.

This would give the Coalition the bragging rights of having approximately 94% of all taxpayers facing a marginal tax rate of 32.5% or less in the 2025 income year.

BDO Comment

The first two steps in the proposed plan provide, at best, modest tax pressure relief to taxpaying households. The hashtag #keepmytendollars is rapidly making its way around social media circles and is evidence of the general feeling of apathy toward these initial measures. While BDO clients may benefit from these cuts in a small way, it is more of the same tinkering around the edges of a clunky tax system.

However, in the event the Coalition is in a position to make good on Step 3 of the proposed plan in July 2024, we could see some meaningful changes to the disposable income of households.

The closing gap between personal tax rates on income up to $200,000 and the corporate tax rate, together with the changes to the Division 7A provisions could see a real change in the focus of tax planning for families running small to medium businesses and high net worth individuals.