Two big rule changes will see millions of Australians save $12.5 billion in taxes within the next year, under federal budget announcements designed to get people spending and the country out of a recession.
The savings are being passed on even though the budget will blow out the deficit as measures are introduced to lower unemployment and help people fare the financial difficulties brought by COVID-19.
“More than 11 million taxpayers will get a tax cut backdated to 1 July this year,” Treasurer Josh Frydenberg said.
“Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic activity.”
Millions can earn more and pay less tax
The federal government has fast tracked tax cuts for some low and middle income earners.
“More than 7 million individuals are expected to receive tax relief of $2,000 or more for the 2020-21 income year compared with 2017-18 tax settings,” Mr Frydenberg said.
“Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic activity and creating 50,000 new jobs.”
Stage two tax cuts work by including more people in lower tax brackets, effectively charging them less tax.
People earning from $37,001 to $45,000 will be charged tax at 19 per cent -- about 13.5 per cent less than their previous bracket.
While those earning from $90,001 to $120,000 will be charged tax at 32.5 per cent -- about 4.5 per cent less.
Treasury estimates the drop in personal income tax will boost the gross domestic product by around $3.5 billion in the 2021 financial year. By the 2022 financial year, they estimate it will add $9 billion and 50,000 jobs.
Tax breaks are likely to be back paid
The changes to the tax brackets could take effect as soon as this month -- about a third of the way into the financial year -- and so the federal government will be offsetting the tax people have already paid with refunds in each pay packet.
Effectively, a year’s worth of tax cuts will be condensed into approximately eight months.
For instance, a person earning $80,000 won’t just receive an extra $20 a week, but rather they’ll get $31 a week as the government catches up on payments.
The following financial year, the tax breaks would revert back to $20 a week.
NAB economists, describing the budget as “one of the most stimulatory budgets we have ever seen”, said backdating tax cuts would help offset tapering government stimulus payments.
“A key decision has been to backdate the phase 2 tax cuts (worth $17.8 billion over four years),” they said.
“The backdating of phase 2 cuts is important as it helps fill the gap to consumers incomes from the reduction of JobKeeper and JobSeeker payments.”
Spend, spend spend
A tax offset was meant to be scrapped when the government introduced the second stage of its tax plan, but as JobSeeker and JobKeeper payments begin to taper, and Australians continue to feel the economic fallout from COVID-19, a decision has been made to renew an offset for another year.
The low and middle income tax offset (LMITO) is intended to put extra money into people’s wallets. How much they receive depends on their income.
The most a single person can get back is $1080, while dual income couples can receive $2160.
When the savings of the LMITO are combined with stage two tax changes, a person who earns $60,000 -- or $80,000, for that matter -- can potentially save about $2160 in taxes, compared to what they would’ve paid in the financial year ending in 2018.
People earning $120,000 gain the largest combined tax break, a saving of $2745.
Tax breaks were among a raft of initiatives introduced in this year’s federal budget. Other changes were made to superannuation, the first home loan deposit scheme and much more.