Tax relief worth up to $1080 for singles and $2160 for dual-income couples will be paid to workers from next week under the new laws that passed Parliament on Thursday evening.
Low- and middle-income workers earning under $126,000 will secure the tax cut for the 2018-19 year as soon as they lodge their tax return.
But long term, the big change to the tax system is the move towards a top tax rate of 30 per cent for 94 per cent of Australians within five years.
This flattening of the tax system concerns critics who warn it makes the tax system less progressive and delivers huge tax cuts to the rich.
For example, a worker on $200,000 a year will get a tax cut worth $11,640 compared with $1205 for someone earning $50,000.
Prime Minister Scott Morrison hailed the tax cuts last night as huge win for the “quiet Australians” and reward for aspirational workers.
“This is a win tonight not for the government, not for the Liberal or National parties, this is a win for those hard-working Australians quietly going about their lives,” Mr Morrison said.
“These are the people we will keep our faith with every single day.
“I said we would burn for them, and that is exactly what we have been doing this week and we will do every single day and week between now and the next election.
“Together, these tax relief measures will create a flatter and better tax system that will improve incentives for hard-working Australians and ensure that 94 per cent of Australians will face a marginal tax rate no higher than 30 cents in the dollar in 2024-25.”
The PM said his government was following the Reserve Bank’s advice to create economic stimulus and would also push forward with infrastructure promises to combat the challenging times.
Treasurer Josh Frydenberg said the legislation would take immediate effect.
“This is a major win for the Australian economy and a major win for Australian taxpayers, because more than 10 million taxpayers will get up to $1080 in their pocket once they put in their next tax return, and the money will flow from next week,” Mr Frydenberg said.
He rejected predictions from The Grattan Institute that the Morrison government will need to cut spending by $40 billion in future years to afford the tax cuts and maintain a surplus.
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Tonight the Parliament voted to reward the aspirations of hard-working Australians. Australians voiced their loud and clear support for our comprehensive tax package at the election. They supported a tax system that rewards aspiration and encourages effort, and today we have delivered it.
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How the tax plan that was legislated will affect you
For workers earning under $126,000
The first stage of the tax cuts doubles the existing Low and Middle Income Tax Offset introduced in the 2018 budget. That is worth up to $1080 for singles or up to $2160 for dual-income families to ease the cost of living.
This is a targeted offset that will be paid to more than 10 million low- and middle‑income earners. If you have an income up to $37,000 you will receive tax relief up to $255.
Nearly two million taxpayers with taxable incomes between $37,001 and $47,999 will receive tax relief between $255 and $1080.
Another 4.5 million taxpayers with taxable incomes between $48,000 and $90,000 will receive tax relief of $1080.
The tax cuts start to phase down for workers earning over $90,000 and around 1.6 million taxpayers with taxable incomes between $90,001 to $126,000 will receive tax relief between $1080 and $0.
The aim of these tax cuts is to lock in the value of the $1080 offset payment as a permanent feature of the tax system.
To do this the government will increase the top threshold of the 19 per cent tax bracket from $41,000 to $45,000 and increasing the low income tax offset from $645 to $700.
This builds on the changes in last year’s Budget, which increased the $37,000 threshold to $41,000 and the low income tax offset from $445 to $645 from July 1, 2022.
It also builds on the increase to the top threshold of the 32.5 per cent tax bracket from $90,000 to $120,000 from July 1, 2022, which the government has already legislated.
A top tax rate of 30 cents for 94 per cent of workers from 2024-2025
The third and final stage – worth $95 billion – is the most controversial because it delivers windfall gains to the wealthy.
The changes will create a giant tax bracket for any income between $45,000 and $200,000 where workers will pay a top tax rate of just 30 per cent.
From 2024-25, the government will reduce the 32.5 per cent tax rate to 30 per cent, more closely aligning the middle tax bracket with corporate tax rates.
The changes turbocharge previously legislated tax changes to abolish the 37 cent rate.
As a result, 13.3 million taxpayers will pay permanently lower taxes in 2024, with an estimated 94 per cent projected to face a marginal rate of 30 per cent or less.