Planned tax cuts for the 2015/2016 year were killed off in 2013, even though average income earners are rapidly moving into higher tax brackets due to ‘bracket creep’. Even if income tax cuts are a dead duck in the short term, by failing to regularly index the marginal income tax rate thresholds in line with inflation, workers end up paying more tax due to cost of living increases in wages rather than real wage increases.
Way back in 2011, the former ALP government announced income tax cuts that took effect from July 2012. At the same time, they also announced further income tax cuts that were planned from 1 July 2015 (for the 2015/2016 year onwards).
During 2013 however, the former ALP federal government informally announced (drip fed via a series of casual comments in various interviews) that the income tax cuts, that were to take effect from 1 July 2015, would no longer happen, due to a budget blowout caused by “an over-hang from the global financial crisis and strong Australian dollar”.
I recall one minister claiming that the tax cuts were only deferred for a later date, but when a government says ‘deferred’, it generally means ‘never going to happen’. I explain what these tax cuts were going to be later in this article, including what tax rates now apply for the 2015/2016 year and future years.
What were the proposed income tax cuts for the 2015/2016 year?
The income tax cuts that were to take place from 1 July 2015 were never legislated and never happened. The proposed 2015/2016 income tax cuts would have raised the tax-free threshold from $18,200 to $19,400, while also increasing the tax rate for those earning over $37,000 (but under $80,000) by 0.5%. I believe the proposed small increase in the tax rate for this income group was designed to partially offset the proposed increase in the tax-free threshold (see Table 2 below).
Current income tax rates: The tax cuts that took effect from the 2012/2013 financial year (and remain in place for the 2015/2016 year and future years), includes a tax-free threshold of $18,200 (see Table 1 below). Under the current income tax rules you can earn up $20,542 (when taking into account the Low Income Tax Offset) before income tax is payable. Note that prior to 1 July 2012, the tax-free threshold was only $6,000, although you could earn up to $16,000 before income tax was payable due to LITO.
Extra tax alert for high-income earners: Since the original income tax cuts were introduced, taking effect from the 2013/2013 year, the Liberal government announced a temporary levy, known as the Temporary Budget Repair Levy amounting to an extra 2% of income tax for those with a taxable income of more than $180,000. The TBRL, which has applied since 1 July 2014, will apply until 30 June 2017 (see Table 1 below).
Higher 2% Medicare levy: The former ALP government increased the Medicare levy by 0.5% to fund the National Disability Insurance Scheme. Since 1 July 2014, the Medicare levy has increased to 2%, from the previous rate of 1.5%, although low-income earners may pay a lower rate of Medicare levy.
Table 1: Income tax rates for 2015/2016 year
|Income||Marginal tax rate||Tax payable|
|$18,201- $37,000||19%||19 cents for each $1 over $18,200|
|$37,001-$80,000||32.5%||$3,572 plus 32.5 cents for each dollar over $37,000|
|$80,001-$180,000||37%||$17,547 plus 37 cents for each dollar over $80,000|
|$180,001 and above||45%||$54,547 plus 47 cents for each dollar over $180,000|
Source: Adapted from information on the ATO website (www.ato.gov.au). Note that Medicare Levy of 2.0% is also payable by most taxpayers.
Table 2: Current income tax rates versus proposed (now cancelled)
|Current||Proposed (now cancelled)|
|Tax scales||2015/2016 year onwards||For 2015/2016 year (cancelled)|
|Threshold $||Marginal rate||Threshold $||Marginal rate|
|4th rate||180,001||47% (includes TBRL)||180,001||47% (includes TBRL)|
|LITO||Up to $445||1.5% withdrawal rate on income over $37,000||Up to $300||1% withdrawal rate on income over $37,000|
|Effective tax-free threshold*||20,542*||20,979*|
Source: Adapted from the Office of the Deputy Prime Minister and Treasurer 2011, Joint media release with Prime Minister (No .081) 10 July 2011, ‘Combining tax cuts with significant tax reform’, and later announcements. *Includes the effect of the tax-free threshold and the low income tax offset (LITO).
For more information on income tax rates see SuperGuide article Australian income tax rates for 2016/2017 and 2015/2016 years (this article contains the tax rates for the 2015/2016 year and future years, and also earlier years).