Billions of dollars should start flowing into people’s bank accounts in July after the Federal Government’s income tax cuts package passed through the Parliament this week.
The Senate passed the package on Thursday night, paving the way for an individual tax cut ranging between $255 and $1,080, depending on how much a taxpayer earns.
The government’s low and middle income tax offset, which was lifted from $530 to $1,080, covers about 70% of taxpayers earning up to $126,000 a year. The offset is calculated on individual income not household income.
Individual taxpayers earning below $37,000 will get up to $255 in tax relief. Those earning between $37,001 and $47,999 will get back $255 plus 7.5% above $37,000 (so that’s relief between $255 and $1,080).
Taxpayers earning between $48,000 and $90,000 will receive the maximum tax relief of $1,080. Taxpayers earning between $90,001 and $126,000 will get relief of $1,080, but minus 3% above $90,001 (so between $1,080 and zero).
People earning more than $126,000 will not receive any tax relief.
The budget papers estimate more than 10 million low-to-middle income earners will receive tax cuts initially totalling about $15 billion.
Eligible taxpayers qualify for a cut after they lodge their 2018/19 tax returns.
Three stage plan to boost economy
The immediate tax cuts are the first stage of the Federal Government’s three-pronged attack on delivering relief and to stimulate an ailing economy.
The second stage to be introduced in 2022/23 is designed to fight bracket creep and lifts the threshold for the 37% tax bracket from $90,000 up to $120,000.
The 19% bracket will be increased from $41,000 to $45,000.
The third stage from 1 July 2024, lowers the existing 32.5% tax threshold to 30%.
Consequently, the 37% bracket is abolished, so taxpayers earning between $45,000 and $200,000 will pay 30% tax plus the 2% Medicare Levy.
Tax cut promise helps liberal coalition retain power
The Federal Government’s $158 billion tax cut package was the centrepiece of a coalition campaign and victory on 18 May.
The fiscal measure will be welcome relief for people in the absence of any meaningful pay rises and for those struggling with crippling household costs, such as power, water, health and education.
Australia’s economy is struggling as shown by the Reserve Bank of Australia’s decision to cut the cash rate by 50 basis points in the past two months to a historic 1%.
However, many banks did not pass on the full half a percentage point cut.
While home loan borrowers and investors on variable rates benefit from interest rate cuts, it’s the reverse for self-funded retirees living off dwindling bank deposit returns.
Their incomes are falling.
Certainly, the RBA would not have cut the cash rate if the Australian economy was performing well. The RBA concluded interest rate cuts were needed to stimulate a slowing economy and to fight rising unemployment.
So, the Federal Government’s tax cut package is a stimulus that just might take the pressure off the RBA to cut rates again in the short-term.