Treasurer Scott Morrison is hoping to woo low- and middle-income earners in this year’s budget with the promise of an immediate income tax cut.
If you earn less than about $90,000 a year – as most Australians do – you will be paying less income tax, possibly as soon as July.
Higher income earners can also expect tax cuts, though they’ll have to wait a bit longer.
Before you get too excited, Mr Morrison has dampened expectations with the warning the cuts will not be “mammoth”. Reports suggest they will be no more than $10.50 a week, and less for most people.
This is what the Treasurer told Chris Uhlmann on Channel Nine over the weekend: “I’m not going to pretend that these are going to be mammoth tax cuts, or anything like that, that wouldn’t be responsible.
“They will be what is affordable, they will be real and they will be within what the budget can afford.”
We won’t know all the details until 7.30pm on Tuesday evening, when Mr Morrison delivers his budget speech in Parliament. But to prepare, here is a guide to exactly how much income tax Australians are paying now.
Australia’s income tax system
Personal income tax is by far the most important tax to the federal government. Last year it accounted for $199 billion – more than half – of the federal government’s total revenue ($383 billion).
That was two-and-a-half times as much as the tax take from businesses ($72 billion) and around three times what the goods and service tax brought in ($63 billion).
In other words, all the services provided by the federal government – pensions, unemployment benefits, health and education being the most costly – are heavily reliant on working Australians paying their income tax.
It means even a moderate cut to personal income tax could have a massive effect on what services the government can afford to fund.
How much you pay
Under current income tax rules there are five income tiers. The lowest one is for people who earn less than $18,200 a year. They pay no tax.
The highest one is for people who earn more than $180,000 a year. They pay a flat $54,232 in tax, plus an extra 45 cents for every dollar they earn over $180,000.
The table below, taken from the Australian Tax Office, sets out how each income tier is taxed. These figures exclude the 2 per cent Medicare levy – which is calculated differently, and which we can be pretty confident will remain unchanged.
According to the ATO’s most recent figures (for 2015-16), the average Australian income is $61,465 a year. Under the current system, they would pay $11,523 in standard income tax (again, excluding the Medicare levy).
At the end of the tax year, when you do your tax return, you will then receive a tax rebate of $78 thanks to something called the Low Income Tax Offset (LITO). Reports suggest it is through the LITO that the government will deliver its tax cuts.
However, a more accurate ‘average’ income measure is the median – the wage of the worker right in the middle – which is less biased towards the top end of income earners.
In Australia, the median income in 2015-16 was $46,108 a year. Under the current system, someone on that income would pay $6532 in standard income tax. At the end of the tax year they will also get a tax rebate of $308 through the LITO.
If those two income figures sound low, that’s because they’re based on all Australian workers, including part-time and full-time.
The average full-time income is much higher – $1628 a week, or $84,600 a year, according to the Australian Bureau of Statistics’ most recent figures.
Under current rules, someone on that income pays $19,042 in tax every year, and gets no LITO rebate.
All of these tax bills will likely be lower as a result of Mr Morrison’s third budget. Tune in on Tuesday night to find out exactly how much you’ll save.
Watch your inbox for The New Daily’s special coverage of the federal budget on Tuesday evening and Wednesday morning.