Tax cuts are on the way – but when?

5 mins read

While the federal election delivered a clear result, the outcome for taxpayers is not as certain. 

The Coalition’s key commitment, an increase in the income tax offset for the 2018/19 year, will be delayed because the Senate can’t be recalled quickly enough to vote on it.

The offset is targeted at low and middle income earners. Its aim is to deliver a rebate of up to $1080 for singles and up to $2160 for dual income families. It was due to be paid after taxpayers lodged their tax returns for the current financial year and would also apply to the 2019/20, 2020/21 and 2021/22 years.

Media speculation suggests that the government is considering other options to ensure that taxpayers receive the offset for the 2018/19 income year. One option would be to enact retrospective legislation in 2019/20.

Uncertain prospects for its entire tax agenda are compounding the difficulties the government faces in delivering a boost to the economy. The government will not have a majority in the Senate. Therefore, if Labor does not cooperate, the Coalition will have to negotiate its agenda with the crossbench.

Meanwhile, some 10 million workers could be affected by a delay in implementation of the tax cuts.

Losing that economic boost

The tax offset in particular is the lever that many hoped would help deliver a quick lift to the flagging economy.

Reserve Bank governor Philip Lowe has highlighted slowing world growth and weakening domestic consumer spending as potential worries for Australia. He has suggested the RBA may cut the cash rate target when it meets in June, and has called on federal and state governments to pull their weight to help reduce unemployment and improve wages growth.

“We are not expecting a quick turnaround in growth in consumer spending, but we are expecting a gradual improvement,” he said in a speech in May1.

“Stronger growth in income will help, but the more important factor is some tax relief.”

Future tax cuts

The government’s tax program, announced in the April federal Budget and during the election campaign, stretches out to the 2024/2025 income year.

A feature of the tax changes to come is the attempt to slow so-called bracket creep by reducing the tax brackets over time.

Bracket creep was responsible for the fact that the amount of tax paid by individuals is increasing at a much faster rate than income – almost 10 per cent over the past year compared with 3.25 per cent the previous year, Lowe said in his speech.

“That’s a big difference and it is unusual,” Lowe noted.

It all adds to the drag on the economy and underlines the importance of the tax offset increases, says Deloitte Access Economics Partner Nicki Hutley.

“Handing tax back as a one-off gets a quick response from the system,” she says.

It would be “quite serious” for the economy if the offset was delayed by another 12 months, Hutley says.

The plan to reduce tax rates to slow down bracket creep is scheduled to begin in three years.

In 2022-23, the government plans to increase the top threshold of the 19 per cent tax bracket from $37,000 to $45,000 and increase the low income tax offset from $645 to $700.

In 2024-25, the 32.5 per cent tax rate will be cut to 30 per cent, according to the plan. The government projects that 94 per cent of taxpayers will pay no more than 30 cents in the dollar in tax. This builds on changes already made into law that include increasing the top threshold of the middle tax bracket from 120,000 to $200,000 and removing the 37 per cent tax bracket.

The result would be just three tax rates: 19 per cent, 30 per cent and 45 per cent.

Small business

Small business was included in the tax handouts during the election campaign, although there’s no timetable for implementation at this stage.

The Coalition has committed to reduce the tax rate for businesses with turnover less than $50 million, from 27.5 per cent to 25 per cent by 2021/22.

Unincorporated businesses with turnover less than $5 million will be able to claim a tax discount of 16 per cent, up from 8 per cent and the Instant Asset Write-Off is increasing to $30,000.

No need to get ‘hung up’ on Budget surplus

With the election campaign over, there’s the chance to regain the lost economic momentum suffered during the uncertainty of an election period, says CommSec Chief Economist Craig James.

It remains to be seen whether the increased tax offsets and proposed rate cut in June will provide the necessary boost to the economy, he says.

“You can put dollars in people’s pockets, but you can’t force them to spend,” James says.

Also, the Coalition’s brave forecast for four years of budget surpluses ahead may not pan out as hoped, adds Deloitte’s Hutley.

“I think they will be able to deliver a surplus next year [financial year 2020]. Mainly because the terms of trade have turned up and company profits have held up reasonably well,” she says.

Hutley points out that failing to deliver the increased tax offset this year will actually boost the chance of a surplus because of the amount of money it would save.

But uncertainty in the international environment is clouding the outlook and, beyond the first surplus, the future is less certain, Hutley says.

“People get a little too hung up about surpluses. While they’re critical for the long term, when there’s a downturn in the economy, it’s more important that we use fiscal policy to avoid a recession than it is to balance the books in any one individual year,” Hutley says.

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Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only. The Reserve Bank of Australia and Deloitte are external entities that are not a members of the Commonwealth Bank of Australia Group of Companies (the Group) and the content or any view expressed by The Reserve Bank of Australia, Deloitte and its employees does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. CBA, nor members of the Group accept any liability for losses or damage arising from any reliance on external parties.