Finance Minister Mathias Cormann, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison at a recent press conference.

$144bn tax plan passes Senate

Thursday, 21 June, 2018 - 15:47

Nearly three in four taxpayers will pay a marginal tax rate of 32.5 per cent from 2025, with the government’s plan to flatten the income tax system approved by the Senate today, despite moves to lower company tax still stalled.

The income tax reform package was supported in the Senate by the two One Nation and two Centre Alliance senators, who joined crossbenchers Corey Bernardi (AC), Brian Burston (UAP), Derryn Hinch (JP), Fraser Anning (KAP) and David Leyonhjelm (LD).

Professional services firm Bentleys director of taxation & business services, Ross Prosper, told Business News flattening the system would bring a range of benefits, including making tax simpler to understand and reducing incentives for taxpayers to use trusts or company structures.

With many taxpayers to be on a 32.5 per cent marginal rate, reasonably close to the company tax rate, Mr Prosper said the use of trusts or companies to structure affairs would not be worth the cost or effort for many.


The new rate and bracket structure. Source: Federal budget

That would mean more income would be taxed through the personal tax system, rather than the corporate, and likely raise revenue, he said.

But the biggest changes were still a long time away, Mr Prosper said, and because of a larger jump in marginal rates between the second highest and top bracket, there was a risk that earners near the top threshold will have bigger incentives to structure affairs differently.

Detail

Treasurer Scott Morrison announced the $144 billion tax cut package in the May budget, a seven-year plan that begins on July 1 this year with a $530 increase in the low income tax offset.

That offset will be paid out in tax returns at the end of the coming financial year.

The entry level for the 37 cent bracket will also be increased by $3,000 to $90,000.

The second stage, which commences in the 2022 financial year, will lift the entry for the 32.5 cent per dollar income bracket by $4,000, to $41,000.

The following year, the entry for the 37 per cent bracket will be increased from $90,000 to $120,000.

In the 2025 financial year, the 37 cent tax bracket will be abolished with the 32.5 cent bracket then to be operating on incomes from $41,000 to $200,000.

At that point, 73 per cent of taxpayers will be in the 32.5 per cent bracket, the government has forecast, while a further 21 per cent will be below that level.

The package is paid for by forecast rising revenue from inflation and economic growth, and effectively limits revenue as a portion of the nation’s economy to about 24 per cent.

Aspiration debate

Prime Minister Malcolm Turnbull said the move would make taxes lower, fairer and simpler.

“This is a win for working Australians who want to get ahead,” he said.

“They will have the certainty that when they earn more, when they get a pay rise or work more hours, they won’t face ever-increasing tax rates.

“As Australians we are lucky to live in a country in which we are able to work, aspire to earn more and not be penalised for it.”

Mr Turnbull said the share of the tax burden paid by income earners in the top tax bracket would rise from 30 per cent to 36 per cent over the course of the plan.

It follows the Labor opposition’s recent announcement that it will repeal the bulk of the tax cuts if it wins the next election, although it has promised to further raise offsets for low-income earners.

Shadow infrastructure minister Anthony Albanese told Sky News the government had dramatically changed position since the previous budget, which he said included $44 billion of tax hikes.

“What they're wanting to do here, is to give tax cuts to the 20 per cent at the top of the income scale in – not this term, not next term, but perhaps the term after that,” Mr Albanese said.

“And it will have an impact of some 12 per cent on the budget on an ongoing basis.

“This has real consequences for the future responsibility of the budget.”

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