February 1, 2018

Tax Cuts & Bracket Creep

Prime Minister Malcolm Turnbull recently addressed the Business Council of Australia and hinted at income tax relief for middle income Australians.

His motivation for this is to combat the tax issue of bracket creep. This occurs where inflation pushes wages and salaries into higher tax brackets and individuals are taxed at higher rates. This is negative as in real terms the value of their wages & salaries has not increased, they have only kept pace with inflation.

One of the ways to avoid bracket creep is to increase the tax brackets to compensate for the effects of inflation.

A decision was made in the last budget to increase the upper threshold of the 37c tax bracket from $80,000 to $87,000. This saved around 500,000 people from moving into the higher tax bracket as inflation increased their wages.

The Parliamentary Budget Office estimates that in the next 4 – 5 years around 900,000 people will move from the 32.5% tax bracket to the 37% tax bracket.

Any potential tax cuts will likely be announced in the May 2018 Federal Budget and the most likely course of action would be a decrease in the 32.5% tax rate for individuals or an increase in the upper threshold for the 32.5% or 37% tax brackets (currently $37,001 to $87,000 and $87,001 to $180,000 respectively).

While this will be great news for middle income Australians, how the tax cuts will be funded will be a challenge for the government.

Daniel Breheny

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