Australia, let’s talk about income tax reform

ANALYSIS: Income tax does not apply to amounts earned below $18,200, and it has been that way for nearly a decade.

The $18,200 portion of tax-free income more than tripled, from $6,000 in 2012-13, and has remained that way ever since — despite other tax brackets being tinkered with over that decade.

Arguably, the biggest changes to personal income tax rates in about a decade are set to arrive in 2024-25, but the no-tax threshold will remain at $18,200.

Someone earning $45,000 currently pays $5,092 in income tax per year, excluding the 2% Medicare levy and any tax offsets.

Raising the tax-exempt threshold to $25,000 would make them pay $3,800 – a savings of nearly $25 a week.

Mark Chapman, director of tax communications at H&R Block, said it was time to raise the tax exemption threshold.

“The threshold has been static for a decade – the last increase was in 2012 – so now is not the time for another increase,” Mr Chapman told Savings.com.au.

Mr Chapman also said it would benefit low-income people who missed out on most of the Lower Middle Income Tax Compensation, or LMITO.

“Any increase would benefit low-income people who are suffering more than any other group from the current cost of living crisis. In short, more people would be taken out of the tax net altogether – the exact number would depend on what it has been increased to,” he says.

A few bracket-shifting scenarios using ABS-defined average full-time earnings are shown in the table below.

Note that the “average” is pushed by a few very high earners; the median is around $78,000.

However, with the advent of LMITO, Dr Adrian ‘Mr Taxman’ Raftery said the $18,200 threshold was redundant.

“The difference between raising the tax exemption threshold and putting tax offsets in place is just when people get their tax benefit,” Dr Raftery told Savings.com.au.

“An increased tax exemption threshold results in a progressive decrease in tax in each payroll package, while the LITO and LMITO are a refund of the tax paid when you file your return at the end of the year under form of lump sum.”


Despite the potential tax savings for low-income people, the Australian Council of Social Services (ACOSS) would not support an increase in the threshold.

ACOSS CEO Dr Cassandra Goldie said people with low or no income need essential services and safety nets, not tax cuts.

‘It would be a poorly targeted way to help low-income earners, as it would also provide another tax cut for high-income earners,’ Dr Goldie told Savings.com.au.

“Instead of cutting taxes, which will not help the bottom 30% of households who are struggling to pay their rent and feed their families, the government should restructure them so that income is collected in a more fair and efficient.”

Tax compensation or higher threshold?

A higher threshold could allow taxpayers to pocket the difference and put it in a savings account to earn compound interest over the year, while a year-end lump sum could ease pressure on bills and allow some to erase the debt.

Dr Raftery said the LMITO is a better policy than a higher threshold.

“If you take advantage of the tax advantage during the year with a higher tax exemption threshold…it will be absorbed as part of the normal spending habits of life, and the majority of people will miss the joy with the forced form of savings that a year-end refund can generate,” Dr Raftery said.

“In my experience over the past 30 years of tax preparation, tax offsets have been great because your clients think you’re Santa Claus and the best accountant in the world for getting them a big fat refund.

“But more importantly, you get feedback from them saying ‘Oh great – refund can pay this or buy that’, and they’re just happy.

“Although at the end of the year the net result would be the same, I would prefer the tax offsets at the end of the year to an increased exemption threshold.”

Disguised tax hikes to come?

In last week’s 2022-23 federal budget announcement, Treasurer Josh Frydenberg said the LMITO for the 2021-22 tax year would be up to $1,500 — an increase of $420 — but n has not announced that it will be extended until 2022-23.

The LMITO had been in place since 2018-19.

That means those earning up to $126,000 could be worse off up to $1,080 at the end of the next fiscal year.

H&R Block’s Mr Chapman has previously said the end of LMITO was actually a tax hike in disguise.

“Unfortunately, this is only a short-term measure… it’s hard to see how this will help reduce cost-of-living pressures in the medium to long term,” he said.

Dr. Raftery echoed the same.

“Assuming there is no change in policy, we will see a lot of unhappy taxpayers 15 months from now when their refund in July 2023 will be significantly lower than in July 2022,” he said.

Australia’s reliance on income tax

Although tax cuts have figured prominently in budget discourse in recent years, taxes as a share of GDP have been rising steadily since 2011.

ABS figures show that for 2019-20 it was 27.8%, down from 26% in 2011-12 – it peaked in those years in 2018-19 when it reached 28.7%.

Among OECD countries, Australia is also more dependent on income tax to generate revenue than other countries.

The Organization found that in 2019 Australia derived 42% of its tax revenue from personal income tax (including personal profits and gains), compared to the OECD average of 23%.

Dr Goldie said Australia should look to other sources of taxation.

“High priority should be given to reforms to taxes on investment income from property and stocks, superannuation, the use of private companies and trusts to avoid tax, the reduction of tax avoidance by multinational corporations and the removal of corporate tax benefits that are economically and environmentally harmful, such as fossil fuel subsidies.” – Dr Cassandra Goldie, CEO of ACOSS.

AMP Capital’s chief economist, Dr Shane Oliver, also said government spending instead of a hot economy carries some risks.

“At some point tough decisions will probably be needed either to cut spending as a percentage of GDP or to raise taxes,” Dr Oliver said.

What about retirees?

The old age pension is also considered taxable income, and the maximum rate of $900.80 per fortnight for a single person exceeds the threshold, meaning the government is taxing its own welfare.

If working and still eligible for the full retirement pension of $23,420.80 per year, a single retiree is taxed at $992 per year.

However, retirees whose retirement income comes solely from the pension are not taxed and are not eligible for LMITO anyway.

Pensioners earning more than $240 a week are currently losing 50c on their pension dollar.

Seniors and retirees can also apply for their own tax compensation, called SAPTO, which compensates up to $2,230 for single people.

National Seniors Australia chief solicitor Ian Henschke said retirees should be able to work more without seeing their payments cut.

“In Australia, only 2.9% of older pensioners are working, compared to 24.8% in New Zealand, which allows older people to work whether or not they receive the pension,” Mr Henschke said.

“If Australia had the same participation rate as New Zealand, there would be up to 400,000 more retirees in the labor force.

“This is a missed opportunity to address labor shortages, boost Australia’s incomes and GDP at a crucial time.”


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