In September, amid a climate of startling interest rates, UK
Chancellor Kwasi Kwarteng announced a series of tax cuts, including the reduction of the top personal income tax rate that applies to those
earning more than £150,000 from 45% to 40%.
Just ten days later, following market turmoil that saw the British Pound drop at one point to a low of $1.035 USD, its
lowest level since 1985, the decision was reversed calling the cuts “a massive distraction.”
Heading into the 2022-23 Federal Budget on 25 October, the question for the Australian Government is different. It is not whether to
introduce personal income tax cuts but whether to keep, amend or repeal the cuts legislated to commence on 1 July 2024.
In Australia, the 2018-19 Budget introduced the Personal Income Tax Plan. The plan implemented three stages of income tax cuts over seven years that will, by 2024-25, simplify the tax brackets and enable taxpayers to earn up to $200,000 before paying a new top marginal tax rate of 45%.
Stages of the plan, bringing relief for low and middle income earners, were brought forward in the 2019-20 Budget and again in 2020-21.
Labor’s pre-election Lower Taxes policy states, “An Albanese Labor Government will deliver tax relief for more than 9 million
Australians through the legislated tax cuts that benefit everyone with incomes above $45,000.” But this month, the Treasurer has subtly
changed the narrative from simply “our policy has not changed on stage three tax cuts” to
“We do need to ensure that spending in the Budget, particularly in these uncertain global times, is geared toward what's affordable and
sustainable and responsible and sufficiently targeted. I think that's one of the lessons from the UK.”
The public appeal of repealing the final stage three tax cuts is understandable. Back in 2018-19 when the plan was first introduced, the
economy was in surplus and Australia was yet to feel the effects of a global pandemic, environmental extremities, and the Russian invasion
of Ukraine.
The tax cuts forego around $240bn of tax revenue over the next 10 years, and because it is percentage based, favours high income earners.
The public policy think tank, the Grattan
Institute,
previously warned that if the government progressed with the stage three cuts “Australia’s income tax system will be less progressive than
it’s been since the 1950s”.
Conversely, the rationale for reforming the current personal income tax regime where the highest marginal tax rate applies from around 2.5
times average full-time earnings (compared to around 4 times in Canada and 8 times in the US), is also understandable.
When it comes to international competitiveness, New Zealand’s top marginal tax rate is 33% (from $180,000) and Singapore’s is 22%,
increasing to 24% in 2023-24.
If implemented, stage 3 of the income tax plan would see around 95% of taxpayers paying a marginal tax rate of 30% or less.
The Government will announce a review of the stage three tax cuts, then open the issue to consultation, locking in the position,
whatever it is, in the 2023-24 Federal Budget.
Look out for our 2022-23 Federal Budget update on 26 October!
As Australia's highest marginal tax bracket impacts more individuals, a growing number of Australians face rising tax obligations due to "bracket creep," where wage growth outpaces tax rate adjustments. This trend is expected to persist, with tax-efficient strategies the backbone for financial advice to help individuals secure long-term wealth.
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