Tax cuts to keep money moving

LOW and middle-income earners can expect a boost of up to $1080 at tax time.

Treasurer Josh Frydenberg resisted the temptation to bring forward the third stage of sweeping tax reforms which would cover the vast majority of workers.

Instead he announced that the low and middle-income tax offset (LMITO), introduced in 2018-19 and extended last year to bolster spending amid the pandemic, will be extended once again.

The $7.8bn measure, which was due to expire at the end of the financial year, affects about 10.2 million workers and delivers a tax refund of $1080 for workers earning $48,000$90,000, before phasing out up to $126,000. Taxpayers earning $37,000 or less benefit by up to $255 in reduced tax.

The offset was introduced as part of long-term changes to Australia’s income tax system, which by July 1, 2024, will create a flat tax rate of 30 per cent for all workers earning $45,000-$200,000, and 45 per cent beyond that threshold.

“Treasury estimates that extending the LMITO will boost GDP by around $4.5bn in 2022-23 and will create an additional 20,000 jobs by the end of 2022-23,’’ the Budget papers say. “When stage three is implemented in 2024-25, around 95 per cent of taxpayers will face a marginal tax rate of 30 per cent or less.’’

While Mr Frydenberg has argued that bringing forward the stage three tax cuts would be a positive measure, this has not happened in this year’s Budget. The second stage was brought forward in last year’s October Budget by two years, as a response to the pandemic.

These changes lifted the upper threshold for the 19 per cent tax rate from $37,000 to $45,000 and the 32.5 per cent threshold from $90,000 to $120,000.

Danielle Wood from the Grattan Institute said extending the LMITO was good policy as it allowed the government to target lower-income workers who tended to spend, rather than save extra income: “You do get a higher bang for buck, your higher fiscal multipliers, with government consumption and investment spending compared to tax cuts, but certainly tax cuts that are targeted at low and middle-income earners tend to deliver higher multipliers because you get less saving of those cuts.”

Westpac chief economist Bill Evans said in a pre-budget update that the government should have been more ambitious around tax reform.