The Federal Budget announcement in May was the first time in 8 years we had not seen any tax cuts, but it seems the Government was keeping these in reserve to help smooth over the introduction of the Carbon Tax. The changes also go a long way towards implementing many of the changes recommended in the Henry Tax Review. So, those who were complaining about the ‘lack’ of action when the Review was released simply need to consider that not everything has to happen within the timeframe of a 30 second soundbite…
The Government has announced that the average household increase in living expenses will be $9.90 per week but through the compensation package they will receive an average of $10.10 per week, so that they are $0.20 per week better off.
The compensation package for Australian consumers will include:
§ pensioners and self-funded retirees will get up to $338 extra per year if they are single and up to $510 per year for couples (combined);
§ families receiving Family Tax Benefit Part A will get up to an extra $110 per child per year ;
§ eligible families will get up to an extra $69 in Family Tax Benefit Part B per year ;
§ allowance recipients will get up to $218 extra per year for singles, $234 per year for single parents and $390 per year for couples combined;
§ taxpayers with annual income of under $80,000 will all get a tax cut, with most receiving at least $300 per year ;
§ the tax-free threshold will increase from $6,000 to $18,200 which will also include an increase from 15% to 19%, and the next tax bracket from 30 to 33% ;
§ the Low Income Tax Offset (LITO) will reduce from $1,500 to $445 ; and
§ the new effective tax free threshold will rise from $16,000 to $20,542.
The real impact of these changes is hard to determine in a ‘one size fits all’ type tax scale. This has been the case since the Low Income Tax Offset and the Family Tax Benefit scale was implemented. In effect, the tax rates change depending on how many children you have, how old they are, what income you earn and how the income is split between spouses. As a result, the net benefit of these tax and welfare changes need to be reviewed on a case by case basis. Even the calculator on the “Clean Energy Future Website” makes very general assumptions, rather than enabling you to enter your precise details to determine the net effects of these changes.
The New Tax Scales
Current | 2012-13 | 2015-16 | ||||
Threshold | Marginal Rate | Threshold | Marginal Rate | Threshold | Marginal Rate | |
1st level | $6,001 | 15% | $18,201 | 19% | $19,401 | 19% |
2nd level | $37,001 | 30% | $37,001 | 32.5% | $37,001 | 33% |
3rd level | $80,001 | 37% | $80,001 | 37% | $80,001 | 37% |
4th level | $180,001 | 45% | $180,001 | 45% | $180,001 | 45% |
Low income tax offset | Up to $1,500 | 4% withdrawal rate on income over $30,000 | Up to $445 | 1.5% withdrawal rate on income over $37,000 | Up to $300 | 1.5% withdrawal rate on income over $37,000 |
Effective tax free threshold | $16,000 | $20,542 | $20,979 | |||
Some points to note…
- The government is claiming to increase the tax-free threshold from $6,000 to $18,200 and have an effective tax-free threshold of $20,542. This is misleading for a number of reasons. First, the current Tax Free Threshold is effectively $16,000 (for incomes up to $31,000) and so the increase is not as large as they say. Second, while normal income tax may not kick in until $20,542 (with the new tax rates) the Medicare levy kicks in at 10% for people earning over $18,839. So the actual change in the Tax Free Threshold is from $16,000 up to $18,839. That’s the first bit of good news.
- In winding down the Low Income Tax Offset, the government has had to adjust some other tax rates. It has been reported that they are increasing the 30% bracket up to 33%, but that isn’t right. In reality (as seen in Table 1 below) the current rate is actually 35.5% for people on $37,000 – $67,000, and that doesn’t change under the new scheme. Also, the current rate is actually 20.5% for people on $30,000 – $37,000, and that doesn’t change under the new scheme. People earning between $30,000 – $67,000 will be paying about $300 less tax per year and will not face higher marginal tax rates. That’s the second piece of good news.
- But not everybody is so lucky. People on $20,500 – $22,200 will see their marginal tax rate increase from 25% to 29% and people on $22,200 – $30,000 will see their marginal tax rate increase from 16.5% up to 20.5% (see bold tax rates in the tables). As can be seen, these rates remain regressive due to the absurdity of the Medicare levy 10% bracket. While these low-income earners will actually be paying less tax thanks to the higher TAX FREE THRESHOLD, they will be facing a higher marginal tax rate. This is important because it is the marginal tax rate that determines the incentive to work. Somebody on $21,000 per year will now have an effective marginal tax rate (EMTR) of 72% (up from 70%) once you factor in the 60% withdrawal of welfare. In reality, not much change there.
- The other group who face higher marginal tax rates are those earning between $67,000 – $80,000, who will see their marginal tax rates increase from 31.5% up to 34% and then 34.5% in 2015 (see bold tax rates in the tables). It is worth noting that these people will not be paying more tax (indeed, somebody on $80,000 will be paying $3 less tax per year), but they will be facing higher marginal tax rates on any increase in income up to that point. Conversely, tax planning and effective deduction claims have that little bit of added benefit.
- It is worth remembering that income taxes are implicitly increased every year due to bracket creep, where inflation pushes people into higher tax brackets even through their real (inflation-adjusted) income hasn’t improved. When you factor in bracket creep over the next two years, these tax cuts are mostly gone, and anybody earning over $40,000 will see a tax increase. (Which is why the election cycle almost certainly leads to additional changes in the tax tables – both parties know that incomes will rise, tax levels rise as well, and they can marginally adjust the tax tables, without adverse cost to government revenue, and look like they are giving back ‘far more’ than the other side ever did!)
- It is also worth remembering that these tax cuts are supposed to be compensation for a new carbon tax. However, while the carbon tax is designed to increase (from $23/tonne to over $100/tonne) the tax cuts will not automatically continue to increase. There is a tax cut in 2012 and another small cut in 2015, and then no further scheduled tax cuts. (although, we also face two elections around this time – in 2013 and 2016, so I would expect that there will be more tax changes proposed as we get closer to these dates – and beyond)
Assuming that, as the system moves from a fixed price to a market based scheme – with a progressive reduction in permits available – the price per tonne continues to rise, either one of two things should occur. A) Revenue from this tax / fee / price (however you wish to define it) will increase, and the government will have scope to increase personal and corporate tax cuts, increase pensions and welfare benefits, or b) Pollution reduction and energy efficiency is improved, with resulting reductions in costs, and the market will realise an overall reduction in effective costs, prices and hence, cost of living, meaning that further welfare or compensation will not be required.
I believe we will see more of the former initially, with a progressive change to a more energy efficient economy over an extended period of time.
Table 1: Actual marginal tax rates (2011)
Marginal Tax Rate | Tax paid | ||
$0 | $16,000 | 0.0% | |
$16,000 | $18,839 | 15.0% | $426 |
$18,839 | $22,163 | 25.0% | $1,257 |
$22,163 | $30,000 | 16.5% | $2,550 |
$30,000 | $37,000 | 20.5% | $3,985 |
$37,000 | $67,500 | 35.5% | $14,812 |
$67,500 | $80,000 | 31.5% | $18,750 |
$80,000 | $180,000 | 38.5% | $57,250 |
$180,000 | $250,000 | 46.5% | $89,800 |
These tax rates take into account the Medicare levy and Low Income tax offset, and the subsequent ‘real’ tax rate as the Medicare levy is phased in, and the LITO is reduced on income above $37,000.
Table 2: Actual marginal tax rates (2012)
Marginal Tax Rate | Tax paid | Tax cut | ||
$0 | $18,839 | 0.0% | ||
$18,839 | $20,542 | 10.0% | $170 | -$256 |
$20,542 | $22,163 | 29.0% | $640 | -$616 |
$22,163 | $30,000 | 20.5% | $2,247 | -$303 |
$30,000 | $37,000 | 20.5% | $3,682 | -$303 |
$37,000 | $66,667 | 35.5% | $14,214 | -$599 |
$66,667 | $80,000 | 34.0% | $18,747 | -$3 |
$80,000 | $180,000 | 38.5% | $57,247 | -$3 |
$180,000 | $250,000 | 46.5% | $89,797 | -$3 |
Table 3: Actual marginal tax rates (2015)
Marginal Tax Rate | Tax paid | Tax cut (from 2011) | ||
$0 | $18,839 | 0.0% | ||
$18,839 | $20,979 | 10.0% | $214 | -$212 |
$20,979 | $22,163 | 29.0% | $557 | -$699 |
$22,163 | $30,000 | 20.5% | $2,164 | -$386 |
$30,000 | $37,000 | 20.5% | $3,599 | -$386 |
$37,000 | $67,000 | 35.5% | $14,249 | -$564 |
$67,000 | $80,000 | 34.5% | $18,734 | -$16 |
$80,000 | $180,000 | 38.5% | $57,234 | -$16 |
$180,000 | $250,000 | 46.5% | $89,784 | -$16 |
So, as a comparison, the tax payable (and effective tax rate) for someone on an income of say $30,000, $60,000 and $100,000 is:
Taxable income | 2011 | 2012 | 2015 |
$30,000 | $3,985 (13.28%) | $2,247 (7.49%) | $2,164(7.21%) |
$60,000 | $12,150 (20.25%) | $11,847 (19.75%) | $11,764 (19.61%) |
$100,000 | $26,450 (26.45%) | $26,447 (26.45%) | $26,434 (26.43%) |
The benefit clearly can be created with some prudent tax planning and, for many business owners, effective income splitting and investment solutions.
So, while the doom and gloom that has been filling the papers and the airwaves around this whole process says one thing, a little digging under the surface will allow you to see where the potential benefit of these proposals are.
There is much still to talk about – and even more to plan for – with this Carbon Pricing arrangement
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