Budget 2018

What do Australia's income tax cuts mean for you?

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The prime minister is heralding the biggest tax reforms in a generation. Here's what they mean for everyday Australians.

After weeks of vicious debate in the parliament and some last-minute Senate negotiations, the Coalition has passed its seven-year income tax plan.

The overall package will cost the treasury $144 billion in lost revenue over the next 10 years, with the money flowing back into the hands of workers.

So when will you see the money in your bank account? It depends on what you earn … and who wins the next election.

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What do Australia's income tax cuts mean for you?Primary tabs
What do Australia's income tax cuts mean for you?Primary tabs

How much will I get back and when? 

The tax cuts will come in three stages, but only one of them is guaranteed.

From 1 July this year, those earning up to $125,000 a year will benefit from the Low and Middle Income Tax Offset.

They won’t notice the money right away because it will come in the form of a “refund” at the end of the financial year (July 2019) when they file their tax return.

Around 4.4 million Australians will get the maximum refund of $530 – those who earn between $48k and $90k.

This government-produced chart shows how the refund tapers out for those who earn less, or more:

Chart showing tax refunds for middle income earners
Australian government

There’s one more subtle change on 1 July too.

The ceiling on the tax bracket that currently ends at $87k will rise to $90k, meaning more dollars will be taxed at 33 per cent. This benefits higher earners too, as they will pay less tax on that part of their salary (that’s how marginal tax rates work).

These 2018 cuts were supported by nearly everyone in parliament – including Labor and the whole Senate crossbench.

Labor has promised to double the cut for these taxpayers if it wins the next election.

They say they can afford that because they don’t support the later cuts (see below), and they would cut down on other concessions like negative gearing and capital gains tax discounts.

Killing 'bracket creep' in 2022

Yes, that’s right, the government's plan four years from now is to fix the phenomenon where workers find themselves drifting into higher tax brackets through inflation, even though their cost of living is rising at the same time.

But hang on … Will the Coalition still be in power then?

Possibly not. This is where the tax plan gets a little more ambitious.

The bill locks in future cuts in 2022 and another round in 2024 (see below), but Labor has promised to scrap them if it wins government in the meantime. So from here on, we could be dealing in hypotheticals.

The government says the 2022 reforms are all about fixing bracket creep. 

So the ceiling on the 33 per cent tax bracket, which will rise to $90k on 1 July, would rise again much more dramatically in 2022: up to $120,000.

That benefits those earning between $90k and $120k a lot, but also those who earn more, because they will pay less tax on that $30k chunk of their income (thanks to the marginal tax rate system).

The ceiling on the lower 19 per cent tax bracket will rise too – from $37k to $41k.

The 2022 changes include a sweetener for low and middle-income earners too. The $530 refund mentioned earlier will increase to $645.

The 2024 cuts – the biggest change of all

The 2024 cuts are the most controversial of the plan. Labor and some on the crossbench tried to strip them from the bill, but ultimately failed.

Again, they could be removed by a future Labor government. The Centre Alliance, which actually voted for the bill, has promised to help undo the 2024 cuts if they get the chance.

The plan would completely delete one of the tax brackets so everyone earning between $41k and $200k is taxed at the same marginal rate of 33 per cent.

That’s a very big change.

As the government points out, it means 94 per cent of Australian workers will pay no more than 33 per cent on any dollar they earn.

As with all the previous changes to brackets, this has a massive knock-on benefit for those earning more than $200k as well, because they will pay less tax on a huge chunk of their income.

Senators, for example, who earn just over $200k on average, would stand to gain about $7k per year once the 2024 cuts are implemented.

Let's just get to 1 July 2018 first. 

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