Workers are widely expected to receive instant tax cuts in the upcoming federal budget, offering small relief to cash-strapped households.
The anticipated bring-forward of cuts initially legislated for 2022 and 2024 will mean workers lose less money to income taxes.
But the size of those savings will be marginal for most, with tax experts cautioning the fast-tracked cuts will do little to stimulate the economy.
Most Australian workers will see their income tax bill drop this year if the federal government brings forward Stage 2 and 3 of the tax cuts legislated after the 2019 federal budget.
It is widely expected that at least the second stage will be fast-tracked.
Under Stage 2 (initially scheduled to start on July 1, 2022), the upper income threshold for the 19 per cent marginal tax rate will be increased from $37,000 a year to $45,000 a year.
The upper income threshold for the 32.5 per cent tax bracket will also be increased, from $90,000 to $120,000.
Workers stand to save between $87 and $2565 a year under these changes.
Stage 3 (scheduled for July 1, 2024) will lower the 32.5 per cent tax rate to 30 per cent and abolish the 37 per cent tax bracket entirely.
This will mean anyone earning between $40,000 and $200,000 will be taxed at the same rate of 30 per cent.
If Stages 2 and 3 are fast-tracked in the 2020 federal budget, workers will save between $87 and $11,640 each year.
Lower taxes for remainder of year
H&R Block tax communications director Mark Chapman said the cuts will put more money into the hands of working Australians.
And they are likely to be rolled out retroactively from July 1, 2020 – as reported by the Australian Financial Review – so the benefits are felt immediately.
Workers will not need to do anything to see those reductions applied, Mr Chapman said.
Instead, the Australian Taxation Office will adjust the tax tables it applies to businesses to work out how much tax to take, and simply take less.
The ATO will account for the three months of taxes already paid from July 1, so workers catch up on the missed savings.
“If the government wants to stimulate the economy then that’s really the only way you can do it,” Mr Chapman said.
“There’s no sense introducing these tax cuts from next July, which is when we would normally introduce tax cuts, because that’s nine months away. The government really needs to see some action now.”
But Mr Chapman said even retroactively applied cuts will have a questionable impact on the economic recovery.
That’s because most of the savings will go to high-income earners who are less likely to have been affected by the pandemic, and who are more likely to put the extra money into savings accounts instead of spending it.
“The problem with these tax cuts is that they probably don’t really target people who actually need them,” he said.
“These cuts were designed at a particular time before COVID, for a particular set of circumstances that applied then.
“The circumstances now are different and it isn’t immediately clear that these tax cuts are the right medicine for the current situation.”
Introducing new tax cuts for low-income earners would be more effective than bringing forward the currently legislated cuts, Mr Chapman said.
A survey of 49 leading Australian economists found only 20 per cent supported fast-tracking the legislated cuts.
And separate research from Deloitte Access Economics partner Chris Richardson found the cuts would do little on their own to spur on economic activity.