Further tax reductions and moving everyone to a 3-step tax scale
The changes
· middle effective rate reduced from 21c to 20c (was 28c prior to July 96)
· income at which top rate kicks in increased from $38,000 to $40,000 (was a little under $31,000 prior to July 96)
· tax scale is simplified. Low Income Rebate built into the tax scale and the same 3-step tax scale applied to everyone.
Impact of the changes
Income band $0-$9,500 with no investment income $9,500 -$40,000 $40,000+
Gain per week $0 up to $10.50 $10.50
No of people 660,000 1,800,000 520,000
· for people with less than $9,500 of income, including some investment income, the exact size of the tax cut depends on
the amount of investment income (eg someone with $5,000 of wages and $2,000 of interest income would gain by nearly $2 a
week. Someone who earns $9,500 exactly, made up entirely of investment income, would gain by $8 a week.)
· example: someone earning a salary of $30,000 will gain by $4 a week
· example: someone earning a salary of $35,000 will gain by $5 a week
Current system
· 2 statutory tax rates: 19.5c up to $38,000 and 33c thereafter
· the Low Income Rebate (LIR) creates a lower first tax step of 15c by giving a rebate of 4.5c on the dollar for the
first $9,500 of wage/salary or benefit income
· the rebate is reduced for income between $9,500 and $38,000 at the rate of 1.5c in the dollar
· this creates a 3 step effective scale for most people:
Þ 15c up to $9,500 (19.5c - 4.5c)
Þ 21c from $9,500 up to $38,000 (19.5c + 1.5c)
Þ 33c thereafter
· someone with only investment income currently pays 19.5c from the first dollar of income. Someone with $5,000 of wages
and $2,000 of interest currently pays 15c on the $5,000 of wages and 19.5c on the $2,000 of interest.
· the system is complex and many people don't know their marginal tax rate.
New system
· gets rid of this complexity by building the Low Income Rebate into the scale and applying the same 3-step scale to
eveyone:
Þ 15c up to $9,500
Þ 20c up to $40,000
Þ 33c thereafter
Cost of the change
· The total cost of the move to 20c to $40,000 plus the simplification to a universal 3-step scale is approx $400m per
year. Nearly all of this is the cost of lowering the effective middle rate to 20c and extending the threshold to
$40,000. Moving everyone to the 3-step scale is about $10m of the total cost.