Budget offers pre-election tax cut for incomes above $80,000

As expected, the 2016-17 budget has offered up a personal income tax cut, timed to take effect on July 1, the day before the election.

The government announced in today’s budget that it would increase the middle income tax bracket (that is, the income level at which taxpayers move from 32.5% marginal tax rate to 37% marginal tax rate) from $80,000 to $87,000.

BACKGROUND TO THE CHANGE: How the income tax system works

Australia’s income system is progressive. Those with incomes under $18,000 a year pay no tax. From $18,000 to $37,000, this increases to 19.5%. From $37,000 to $80,000 (at present), it increases to 32.5%, and so on for higher and higher income brackets.

Crucially, the higher tax rates are only applied to income above the threshold. In other words, once your income ticks over the threshold into the next bracket, you pay the higher rate only on the dollars over that threshold. Moving into a higher tax bracket does not mean that you pay the higher rate on all your income.

WHAT WILL THE CHANGE MEAN IN PRACTICE?

Given the structure of the income tax system, raising the middle threshold from $80,000 to $87,000 will be a tax cut for anybody who earns above $80,000, of up to $315.

Who earns over $80,000? 3 million Australians, according to the Treasurer. By definition, these will be the 3 million highest-income Australians. As was pointed out in the days before the budget, they earn well above the average income, comprising the top 20% of taxpayers.

This is not the only part of the budget that will see the highest income earners will benefit. The temporary deficit levy, an extra income tax introduced in 2014-15 to apply to the highest earners only, was not featured in today’s budget, even though there was some discussion that it might be retained.

The majority of taxpayers, those below $80,000, will not experience any change to income tax.

HOW MUCH WILL IT COST?

Tax cuts, of course, come at the expense of government revenue. The budget papers estimate that the cost of this cut will be $4.0bn over the next four years.