Tuesday, May 13, 2008

Budget o8: Stand by for further income tax cuts

Regardless of what Wayne Swan's tax inquiry finds.

The Treasurer has committed himself to extra tax cuts beyond those promised during the election, setting aside an additional $6 billion to fund further tax cuts from 2011-12.

From July this year no worker will pay tax until his or her income reaches $14,000 – up from $11,000 at present. No-one will pay the 30 per cent rate until their income reaches $34,000 and on-one will pay 40 per cent until they earn $80,000.

By July 2010 no worker will pay tax until their earnings reach $16,000 and no-one will pay the 30 per cent rate until their earnings hit $37,000. The 40 per cent rate will fall 37 per cent.

In last night’s budget papers the Treasurer announced plans to go further...

...outlining his “aspiration” to cut the 45 per cent rate to 40 per cent and the current 40 per cent rate to 30 per cent by 2013-14.

Further increases in the Low Income Tax Offset would ensure that by 2013-14 no worker paid income tax until his or her earnings hit $20,000.

The Treasurer has set aside $6 billion in the forward estimates to fund the first year of the additional cuts in 2011-12.

His announcement partly preempts the wide ranging taxation inquiry that he has set up headed by the Secretary of his department Ken Henry.

Mr Swan announced the terms of reference last night. Dr Henry and four others have been asked to report by the end of 2009 on the appropriate balance between taxation of the returns from work, investment, savings and consumption with the proviso that they recommend no changes to the Goods and Services Tax.

The committee has also been asked to examine environment taxes and the interaction between the tax and welfare systems.

The committee has been asked not to “presume a smaller government sector”.

Its first discussion paper will be released at the end of July.

Other tax and benefit changes announced last night will take payments away from high income earners, although perhaps not quite to the extent predicted.

The Treasurer’s speech says that from January next year the $5,000 baby bonus will be denied to couples earning in excess of $150,000 a year.

But the way the change will be implemented will be less severe.

A couple will be able to earn up to $75,000 in the six months immediately after the birth of their child before being denied the benefit.

Because a mother not entitled to maternity leave would receive no income during this period it effectively allows the father to earn up to $150,000 per annum by himself – a higher threshold than suggested by the Treasurer.

From January all parents receiving the baby bonus will be paid it in six-monthly installments rather than in one lump sum at present.

From July the Family Tax Benefit Part B and the Dependent Spouse and Invalid Relative tax offsets will be denied to families earning more than $150,000 per annum.

In addition the definitions of income used in calculating government financial assistance will be broadened to include some salary sacrifice contributions to superannuation as well as reportable fringe benefits and rental properly losses.

The effect will be to deny government benefits from more high income earners, netting the government an extra $522 million over four years.

The government has also promised to bring more fringe benefits into tax net including meal cards and laptops not primarily used for work, netting it $1.4 billion over four years.

But notably it has taken no action against the arrangement by which cars provided in lieu of salary face a lower tax rate than other fringe benefits, with the rate decreasing the more kilometres the car is driven.

The Australian Conservation Foundation has claimed the concession is on track to cost $2 billion a year.

The government has delivered on its election promise to lift the Childcare Tax Rebate from 30 per cent of costs to 50 per cent and has delivered most of its promise to introduce concessionally-taxed First Home Saver Accounts.

The government will now make a flat 17 per cent matching contribution to those accounts instead of its proposed sliding scale that would have rewarded high-income earners more than low income earners.