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Australian Government Proposes A$34bn Tax Cut

by Mary Swire, Tax-News.com, Hong Kong

17 October 2007

The coalition government of Prime Minister John Howard has announced a plan to provide some A$34 billion (US$30 billion) in personal tax cuts, as the countdown to next month's general election begins.

Presenting the plan to the media on Monday, Treasurer Peter Costello claimed that the tax reform plan will result in a "significant reduction in taxes for all individual taxpayers" and would be a "decisive reform" that would increase competitive of the Australian tax system while maintaining the sustainability of the revenue base.

The tax cuts build on reductions which took effect on July 1, 2007, and will be phased in over three years. Under the reforms, from July 1, 2008:

  • The Low Income Tax Offset (LITO) will increase from $750 to $1,200, providing an effective tax free threshold of $14,000 (up from $11,000) to those taxpayers eligible for the full LITO;
  • The 30% threshold will increase from $30,001 to $34,001; and
  • The 40% threshold will increase to $80,001 and the 45% threshold will increase to $180,001, as announced in the 2007-08 Budget.

From July 1, 2009:

  • The LITO will increase to $1,350, providing an effective tax free threshold for low income earners of $15,000;
  • The 30% threshold will increase to $35,001;
  • The second top marginal rate will be cut from 40 to 38%; and
  • The top marginal rate will be cut from 45 to 43%.

From July 1, 2010:

  • The LITO will increase to $1,500, providing an effective tax free threshold for low income earners of $16,000;
  • The 30% threshold will increase to $37,001;
  • The second top marginal rate will be cut from 38 to 37%; and
  • The top marginal rate will be cut from 43 to 42%.

Senior Australians eligible for the senior Australians tax offset (SATO) and the LITO currently do not pay tax after assessment until they reach an annual income of $25,867 for singles and $21,680 for each member of a couple. From 1 July 2008, these income levels will be lifted to $28,867 for singles and $24,680 for each member of a couple. From 1 July 2009, these incomes levels will be lifted to $29,867 for singles and $25,680 for each member of a couple. By 2010-11, the income levels will be $30,685 for singles and $26,680 for each member of a couple.

The fringe benefits tax rate will also be reduced in line with reductions in the top marginal tax rate (including the Medicare levy), decreasing to 44.5% from 1 April 2009 and to 43.5% from 1 April 2010.

The tax plan is intended to build towards an ambitious new goal for Australia’s personal income tax system so that over five years, the personal income tax system will feature:

  • An enhanced low income tax offset (LITO) that will mean that low income earners will have an effective tax free threshold of at least $20,000;
  • A rate scale of 15%, 30%, 35%, and 40%;
  • Forty-five per cent of taxpayers facing a marginal tax rate of 15% or less;
  • Eighty-five per cent of taxpayers facing a marginal tax rate of 30% or less; and
  • Ninety-eight per cent of taxpayers facing a marginal tax rate of 35% or less.

Costello stated that these goals can be met if "the expected strong economic and fiscal conditions continue".

The Howard government claims that Australia is a low tax country compared to the standards of the developed world, being ranked the eighth lowest in the 30-member OECD. With the fall in the top marginal tax rate as part of this tax reform, the government says that Australia’s attractiveness to highly skilled workers from overseas will be enhanced.

The average (‘all in’) top marginal rate for OECD countries was 46.6% in 2006. This is around the current 'all in' rate in Australia at present. The plan to lower Australia’s top marginal rate to 42% from 1 July 2010 – when the Medicare levy of 1.5% is included – will give an 'all in' top rate of 43.5%, Costello stated.

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