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The Coalition v Labor: which tax cut will put more in your pocket?

liberal labor tax cuts election scott morrison bill shorten

Immediate tax cuts

The good news is that both Labor and the Coalition are prepared to splash cash to get your vote at the next election.

Both are offering an immediate tax cut that can be claimed when you lodge your tax return this year, though there are bigger differences further down the track.

The offset offer

Both parties have promised to introduce a new low- and middle-income tax offset that can be claimed by anyone earning up to $126,000 in this year’s tax return.

This is in addition to the existing low-income tax offset, which is only available to a smaller group of taxpayers.

After being outbid by Labor when it announced its original offset last year, the Coalition has promised to lift its offset from $200 to $255 for those earning less than $48,000.

It will then be phased up to a maximum of $1080 (previously $530) for those earning between $48,000 and $90,000 and then phased down again so that anyone earning more than $126,000 is ineligible.

Labor has agreed to match the maximum offset but offered a $350 offset for those earning less than $48,000.

Labor has also agreed to match the Coalition’s plan to increase the top threshold for the 37% tax bracket from $87,001 to $90,001, which will deliver everyone earning more than $87,000 a tax break as they will be paying less tax on that extra income.

According to the government, this will result in a tax cut of $135 for anyone earning over $126,000. All up, it says someone on $90,000 will receive a $1215 tax cut.

Down the track

However, the big differences emerge in the longer-term view.

The Coalition has put forward a plan for major tax reform that extends out to 2024-25 and succeeded in having this plan legislated last year, despite having to win two elections before it can be fully implemented.

As the table shows, the Coalition has promised to eventually eliminate the 32.5% and 37% marginal tax rates so that everyone earning between $45,001 and $200,000 will have a marginal tax rate of just 30%.

(The new offset will disappear as the tax rates are changed so that the tax cut is maintained in the new rates.) It claims 94% of taxpayers will be on a marginal rate of 30% or less by 2025.


 

Labor wants to keep the immediate tax cuts but repeal the future changes, which it says are too expensive to be locked in so far in advance.

It also argues that the future cuts, particularly the extension of the 30% bracket to higher earners, are skewed to higher-income earners and it would prefer to offer a better deal to lower-paid workers. Those earning less than $37,000 receive no benefits from the cuts after those coming in this year.

In his budget reply speech, Labor leader Bill Shorten said 6.4 million people would pay the same amount of tax under Labor as under the Coalition, while another 3.6 million people would pay less.

The Coalition claims around 13.3 million people will pay less tax by 2025 when its full plan is implemented.

Written by Annette Sampson

Annette Sampson

Annette Sampson has written extensively on personal finance. She was personal editor of The Sydney Morning Herald, a former editor of the Herald's Money section, and a columnist for The Age. She has written several books.

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  1. You fail to comment on the massive dividend imputation tax hike under Labor and the effect on low income savers. This is one of a raft of tax hikes under Labor. Can you please model these and add to your estimates.

  2. It is clearly skewed towards higher-income earners and for my part I’m happy to forgo the dividend imputation gift. I feel not comfortable that the younger generation pays in tax for that generous gift.

  3. Peter – Labour aren’t hiking taxes on dividends. They’re simply proposing rules that retain company tax within govt coffers for the benefit of other tax payers, not non-taxpayers.

    • Wrong. Labor have managed to find a way to tax Superfunds in SMSF’s 30% tax by not allowing funds to have the benefit of tax exemptions on their super funds.

  4. Self funded retirees are going to cope a massive hit with the Labour proposal to end Franking credit rebates. Admitably there has been an abuse of the system through trusts and self managed super funds with high balances, but where this is really going to hit is the self funded retiree that is just above the cut off level for the pension. They will loose their entitlement to the franking rebate, whereas a pensioner that is being paid by the government still retains their ability to claim the rebate credit. Where is the fairness in that.

    • Mark If a retiree receives cash handouts for franking credits, the retiree is not self funded. It doesn’t matter if you receive a gift from the tax office or a pension from CentreLink. It comes all from general revenue. It’s also not a rebate if you get it as a gift. It’s only a rebate if you include the grossed up dividend in you taxable income. If you owe tax after that, it becomes a rebate on tax owed. It’s fair for Labor to cancel it. Poorer people who have no shares should not have to pay a bonus to wealthier shareholders.

  5. Why do people who complain about tax cuts favouring the higher income earners only refer to how the higher income earners will pay thousands less and the lower income earners will only get to pay hundreds less?

    Why don’t these people state how much tax the people they are comparing WILL pay and not how much they will NOT have to pay?

    Clearly because their argument would lose most of it’s validity.

    Someone on $15k would miss out on tax cuts altogether, but they pay NOTHING anyway! So you could compare them with anyone and say how unfair it is that they miss out on the tax cuts altogether if you talk about how much the tax cuts will deliver to them!

    Of course they would be struggling to survive, but that is a totally different matter!

  6. I wish all of this information was presented at the family income level rather than the individual level – as that is how most people are assessed is it not? My partner and I are on very different levels of income and I’d like to know what the tax changes mean for us given our aggregate income. Can this be provided?

  7. Labour’s proposal to change franking credits was a mistake and they have paid for it with voting at the election. Just about all self funded retirees would have voted against them.

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