The Coalition’s cost-of-living budget will create a tax “cliff” in the second half of next year that will leave 3.5 million Australians worse off and hit dual-income families particularly hard.
Exclusive modelling compiled for The Age and The Sydney Morning Herald reveals net taxes paid by people earning less than $90,000 a year will go up by $1500 when the federal government ends the low and middle-income tax offset (LMITO) in 2022-23.
Treasurer Josh Frydenberg announced the $420 increase to the low and middle-income tax offset on budget night. Its end will create a $1500 income cliff for 3.5 million people.Credit:Alex Ellinghausen
In his pre-election budget, Treasurer Josh Frydenberg increased the LMITO, which was worth up to $1080, by a one-off $420, describing it as cost-of-living relief for more than 10 million Australians. The bonus and the offset will cost the budget more than $12 billion.
But he did not extend the offset, which was introduced in 2018 and is paid as a refund on a person’s annual tax return, beyond this financial year.
Mr Frydenberg also announced a one-off $250 cost-of-living payment to 6 million welfare recipients, including people on JobSeeker, at a total cost of $1.5 billion.
The modelling by the Bankwest Curtin Economics Centre reveals the end of the offset, along with the impact of the cost-of-living payment, will create problems for millions of people next year and a political headache for whichever party is in office.
“The additional $420 in cost-of-living support delivered through the low and middle-income tax offset in 2020-21 generates a cliff in the support provided by the tax offset,” centre director Alan Duncan said.
“The withdrawal of the low and middle-income tax offset from 2022-23 onwards will lead to an increase of $1500 in net taxes paid by people with taxable income between $48,000 and $90,000. This constitutes nearly 3.5 million taxpayers of whom 50 per cent are women.”
A person on a pre-tax income of $90,000, just above the current average full-time wage, will this year take home a net $69,983 after this week’s budget. In 2022-23, their take–home pay will fall $1500 to $68,483.
A person earning $125,000 a year will earn a net $91,633 this year due to the increase in the LMITO. They will take home just $160 less than someone on $126,000, which is the cut-off for the offset. But in 2022-23, the person on $125,000 will take a $420 cut in their net income while the person on $126,000 will receive the same.
There are also anomalies caused by using the tax system to deliver the cost-of-living relief package.
A couple where both people earn $90,000 a year will get an extra $840 in relief thanks to the LMITO bonus. A single-earner couple where one person is on $90,000 but the other is on JobSeeker ($17,189) will get $670 in relief.
Once the offset ends, the dual-income couple of $90,000 faces a $3000 increase in their tax liability. The couple with the single-income earner and JobSeeker partner will “only” be $1500 worse off.
Recently married 23-year-olds Ethan and Paige Crosweller, double-income earners both taking home less than $125,000 a year, are among those considered winners from Tuesday’s budget.
Renting a small apartment in Ashfield in Sydney’s inner west, they will receive a combined $3000 tax offset this year and plan to make good use of it.
“Petrol prices are skyrocketing and everyone is talking about how groceries are going to get more expensive,” Ms Crosweller said. “So it’s reassuring that those rising prices might be balanced by the tax coming back to us.”
And they’re aware the offset will end next financial year.
“We won’t complain about not getting a tax break for longer than we are,” Mr Crosweller said.
Fraser Rise’s Rajarsh Saini with wife Shaninder Kaur and children Sanav Sani, 7, and Jahan Saini, 9.Credit:Chris Hopkins
Working professionals Shaninder Kaur and Rajarsh Saini, from Fraser Rise in Melbourne’s north-west, are also eligible for the $1500 offset this year.
Ms Kaur said it would help address the financial difficulties associated with higher petrol prices, grocery expenses and household bills.
“That amount of money that’s coming to us would be very, very helpful, especially for a growing family,” she said.
Ms Kaur said the cost of living would be harder when the tax offset came to an end, particularly amid a volatile global environment.
“We haven’t seen what next year holds. Are we going to be in lockdown? Are we going to be working from home?” she said.
Addressing the National Press Club this week, Mr Frydenberg said the offset was extended only because of the COVID-19 crisis and was “never meant to be a permanent feature of the tax system”.
He pointed to the government’s three-stage tax-cut plan, noting that in 2024-25 the 37 per cent threshold would be abolished as part of a process that would make the system fairer and simpler.
“They’ll pay less taxes under us. That is what our plan is. LMITO was only meant to be temporary,” he said.
Labor leader Anthony Albanese this week also refused to promise to continue the offset, the fuel excise cut, and the $250 cost-of-living payment if it won the upcoming election.
“We won’t be making those sorts of commitments,” he said.
But the modelling also shows longer-term problems due to changes to the tax system.
A person with a pre-tax income of $75,000 will, under this week’s budget, take home $60,158 in net pay, an improvement on the $59,738 they were earning.
But in 2024-25, under current plans, they will have a net income of only $59,408 – a drop of $330 on what was expected before Mr Frydenberg’s budget changes.
Even a person on a gross wage of $90,000 will be only $50 a year better off in 2024-25. Someone on $250,000 – who does not get LMITO – will be $9075 in front the same year.
A person on $250,000 will face a marginal tax rate of 47 per cent for every extra dollar they earn. A person on $30,000 faces an effective marginal tax rate of 68.4 per cent.
The modelling also confirms women, who dominate the number of low and middle-income earners, will miss out on the expected gains from the government’s third stage of tax cuts.
Professor Duncan said the average annual net income of men would increase by $2822 by 2024-25 due to the cumulative tax changes since this year. For women, the cumulative average increase will be $429.
with Thomas Bailey and Anthony Segaert
Jacqueline Maley cuts through the noise of the federal election campaign with news, views and expert analysis. Sign up to our Australia Votes 2022 newsletter here.
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