Friday 26 January 2024

Labor's proposed change to the legislated 'stage 3' income tax cuts

Having had two previous 'stages' of income tax reform legislation targeted mostly at low and middle income earners, the previously legislated 'stage 3' tax cuts were intended to finally provide some simplification of the rather complex range of 'tax brackets' used in Australia, and pushing the top tax bracket (45% income tax + 2% medicare levy, which, when you spend 'after tax' take-home pay on practically anything that isn't unprocessed food, will then have another 10% GST charged).

The 'stage 1' tax cuts were in response to the risk of a recession due to the Covid pandemic, and was a temporary tax offset targeted only at low and middle income earnings. Then 'stage 2' introduced a permanent tax offset of between $455 and $700 for low and middle income earners, cutting out for those earning more than $66Kpa.

The 'stage 3' tax cuts were intended to simplify the tax brackets by eliminating the 37% tax bracket and reducing the 32.5% to match the standard company tax rate of 30%. Instead of the 37% tax rate applying to income above $120Kpa, the new 30% rate would have applied up to $200Kpa. To a large extent this was simply bringing the tax brackets back in line with the multiples of average income that had applied before inflation and 'bracket creep' had steadily moved more and more people into the higher tax brackets.

However, although Labor made a 'pledge' to honour the 'stage 3' tax cuts if they won office at the last election, giving a tax cut to 'the rich' rather than the Labor support base was going to be politically appealing to a Labor government. Hence the last minute decision to 'adjust' the legislated 'stage 3' tax cuts less than 6 months before they were due to come into effect from 1 July 2024.

The 'adjustment' is actually quite politically savvy, as it provides a new round of significant tax cuts to a large group of low and middle income workers who are Labor's traditional support base, but still provides a tax cut to higher income earners -- so Labor can go with the catch phrase 'everyone gets a tax cut!'. The new 'stage 3' tax regime even comes at 'no cost' to the overall budget (compared to the original 'stage 3' plan), as it simply slashes the tax reduction that would have benefitted those earning over $150Kpa, and instead redistributes the tax saving to low and middle income workers.

Although I'm not in favour of governments breaking promises (especially ones that they had explicitly vowed to not break, in order to win an election), this change is actually not too bad. The worst aspect is that it will retain both the 30% tax rate and the 37% tax rate. One of the best results of the original 'stage 3' plan was that it would combine these tax brackets into one, and make the rate the same as the business tax rate.

MLC put out a nice graphic clearly showing who the 'winners' and 'losers' are going to be from this revision of the 'stage 3' tax reform:

Directing the tax cuts towards the lower income cohort will likely also provide a bigger economic boost, as it will provide a much larger relative boost to discretionary income at the lower income levels.

Personally I might even benefit from this revised tax cut by around $804pa, whereas I would have seen no benefit at all under the original plan, especially as my taxable income is considerably reduced by my negatively geared rental property investment.

In the long term it will also provide a boost to my retirement income - although the superannuation pension will be tax free, any significant income from investments or realized capital gains would have been taxable -- so a reduction in the tax rates applicable at lower levels of taxable income might be helpful.

The retention of the 37% tax bracket applying to taxable income above $135Kpa will also mean that my investment in an Investment Bond may be more tax effective in the long run that it otherwise would have been.

Even DS1, who recently gained a promotion and pay rise (to around $140Kpa), won't be adversely affected (in the short term) by this change. But a few more years of promotions and pay rises will see this impact him.

Basically the extra tax paid by someone earning $200Kpa will be used to fund the Labor tax cuts being handed out to five Labor voters on average wage.

Of course a successful professional can always either take their skills to an overseas job market where income tax levels are more reasonable. Or else use a business structure to ensure their personal taxable income stays within the 30% tax bracket and additional company income is taxed at the 30% company tax rate and used to invest in business property or grow the business. So a 'tax the rich' strategy can be counterproductive to long term economic development -- but most politicians never look beyond the next election cycle.

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mOOm said...

BTW only about half of the GDP has GST on it as health, education, rent etc. all exempt.

mOOm said...

Also Stage 1 and especially 2 moved the tax bracket threshholds. I'm a loser from the change to Stage 3 with taxable income of near $250k and Moominmama on $30k after deductions... She has negative tax. said...

Aside from no GST on unprocessed food stuffs, most of the other GST exemptions (I think) are there to avoid 'double taxation' ie. there is no GST of bank fees, council rates, stamp duty etc. as there is already tax/levies/duties embedded in those. One double tax they didn't exclude is GST on petrol, when the price already includes petrol excise. Similar with rents -- rents move up in line with housing construction costs, which have GST applied, so charging GST on rent would effectively be charging GST on GST inflated prices to some extent. Not to say they couldn't charge GST on raw foods, rent, education etc., but they had to carve these out when GST was introduced or it never would have been able to 'get up' with the electorate. Since about 30% of GDP is government spending, it isn't surprising that GST exemptions apply to around half of GDP.