Scott Morrison's plan for $140 billion in income tax cuts: here's how it works

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  • The government announced plans for big changes to the income tax system over the next seven years.
  • Low to medium income earners will score a $530 lump sum rebate from this year – a $10 a week tax cut – when they lodge their tax return.
  • By 2024, 94% of Australian workers will be on the same marginal tax rate of 32.5%.

One of the boldest announcements in Scott Morrison’s budget is his long-term changes to the personal income tax brackets.

The vast majority come after the next two elections, establishing a potential line of attack for the government against the Labor opposition, which it lags in the polls. The changes will cost the budget $140 billion over a decade, but on the upside, the Treasurer is predicting the budget will be balanced a year earlier, by 2020.

The long-term vision is to have just three income tax brackets by 2024, abolishing the current 37% rate, which is currently paid by Australians on an annual income of between $87,001 and $180,000.

His proposal effectively creates a flat tax rate seven years from now with everyone earning between $41,000 and $200,000 in the same 32.5% tax bracket. That’s 94% of taxpayers.

In the long run it will be a big win for those earning above $90,000 a year, but in the short term the benefits go to low to middle income earners. His plan effectively ends the bracket creep most often experienced by taxpayers earning just a few thousand dollars over the average annual income of around $84,000.

(It’s worth noting that that “average” figure puts you in the top quarter of taxpayers.)

But before explaining the changes, here’s a recap of the income taxes you currently pay.

The existing tax brackets are 19%, 32.5%, 37% and 45%, and do not include the Medicare levy.

Here’s when they kick in:

  • $1–$18,200: Nil
  • $18,201–$37,000: 19c for each $1 over $18,200
  • $37,001 –$87,000: $3,572 plus 32.5c for each $1 over $37,000
  • $87,001–$180,000: $19,822 plus 37c for each $1 over $87,000
  • $180,001-plus: $54,232 plus 45 cents for each $1 over $180,000

Here are the key changes starting from July 2018.

For annual incomes up to $37,000

You tax bill will be reduced by up to $200 – a cup of coffee a week – in a lump sum.

The low-income tax offset (LITO) will be paid when you lodge your tax return.

For annual incomes of between $37,001 and $48,000

The same LITO will deliver a $530 lump sum payment, or around $10 a week. For a dual income household with both people earning a wage in that range, they would get a lump sum payment of just over $1000.

Four years from now, the plan is to increase the 19% tax threshold to $41,000, giving around 500,000 people a tax break that would save them another $540.

For incomes between $48,001 and $90,000

The tax threshold will increase by $3000 to $90,000 from July 1, delivering a $135 tax cut to around 210,000 workers now in the 32.5% bracket.

Taxpayers in this bracket also get the $530 lump sum. This applies to around 4.4 million people.

For incomes between $90,001 and $125,000

The $530 lump sum still applies but tapers off to zero at $125,000.

Someone on $125,000 can expect to see their tax bill fall by around $140 annually – about $2.69 a week, thanks to that change in the 32.5% threshold to $90,000.

In the meantime, everyone earning between $90,000 and $180,000 will still pay 37 cents in the dollar in tax for the next four years.

But hold out for 2022, when Morrison plans to lift the 32.5% marginal tax rate from $90,000 to $120,000 – the same year the 19% threshold rises to $41,000.

Two years later, the windfall lands for around 1.8 million workers when the country’s second top tax rate, 37%, is abolished.

Above $180,001

You’ll keep paying tax at 45% until July 2024, when the 37% tax bracket is scrapped.

But the increase in the 32.5% threshold to $200,000 will deliver a big windfall to everyone earning over $90,000 and if you’re on $200k, you’re laughing.

Here’s our back-of-the-beer-coaster calculations of how the new tax system would look in 2024:

  • $1–$18,200: Nil
  • $18,201 – $41,000: 19c for each $1 over $18,200
  • $41,001 –$200,000: $4,332 plus 32.5c for each $1 over $41,000
  • $200,001-plus: $56,332 plus 45 cents for each $1 over $200,000

For someone on $200,000, we calculate your current tax bill (excluding deductions) currently sits at around $63,232.

By 2024, that tax bill falls to $56,332 – saving of nearly $7000 or around $130 a week.

It’s a best-of-both-worlds to answer Morrison’s critics. Those most in need get a modest benefit now, as he moves towards balancing the books, with the promise of those tax cuts to the Coalition’s base.

“Under the Turnbull government’s personal tax plan, most working Australians earning above $41,000 are likely to never face a higher marginal tax rate through their entire working life,” he said in his budget speech.

And the government argues the lion’s share of the income tax burden, 61%, still falls on the top 20% of taxpayers.

Bill Shorten now has 48 hours to figure out how Labor will respond to the Morrison plan in his budget reply speech on Thursday night.

Any opposition from Labor will give the government the chance to paint the ALP once again as the party hell bent on taxing hard-working middle Australia.

All the Turnbull government has to do to deliver on the plan is win the next two elections.

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