21 days after the Federal Government did an about-face on its earlier promise to maintain the previously legislated income tax regime, it has secured passage through the House of Representatives of major changes to Australia’s income tax legislation. But speed and the evident equity in the major part of those changes, principally directed at “middle Australia”, has poorly served the interests of Australia’s low paid workers. Might the Senate crossbench prove to be the voice of the low paid?
The Federal Government has now secured passage through the House of Representatives of amending taxation legislation that achieves its principal objective. In the words of the Treasurer, “We are returning bracket creep where it matters most and where it hurts the most, which is in middle Australia.”
It came with stunning speed: only 21 days after the Government’s about-face on the Stage 3 tax cuts was announced. This major piece of taxation reform, with open-ended operation, was clearly influenced by the electoral value of a tax policy that would go down well in the Dunkley byelection on 2 March 2024.
Nevertheless, there was a very strong argument, based on improved equity across income groups, for substantial changes to be made to the earlier legislation, enacted under a Coalition Government in 2019.
Was the speed of this change too fast for a proper analysis of the amendments?
The selling of the “middle Australia” tax package included the fact that low-income Australians would be $15.00 per week better off, providing them with some compensation for the rising costs of living in recent years and a buffer against future bracket creep. This was done without any analysis of whether the increase was sufficient to compensate for past bracket creep that has produced bigger tax bites into incomes that have been stretched to the limit by rising costs.
While middle Australia taxpayers have secured increases that have largely negated the bigger tax bites over the last decade, low-income taxpayers have received tax cuts that lock them into substantially bigger tax bites than those of a decade earlier. $15.00 per week is not enough to cover the losses through those increases, let alone protect them against future bracket creep.
This Labor legislation has low paid workers paying more of their incomes in tax than was the case a decade ago following the taxation reforms of the Rudd and Gillard Governments. I explained this consequence in my article in Pearls and Irritations on 30 January 2024.
To illustrate: even after the Government’s changes, in 2024-25 the worker on the lowest award rate for a cleaner (estimated to increase by 4% from 1 July 2024) would lose $30.70 per week through bracket creep over the past decade.
The public response to the Government’s proposals has been, for the most part, positive, but it has focussed on a comparison between the benefits of the changes proposed with no consideration of the treatment of low-income workers relative to middle income taxpayers. The trade union movement has not engaged in this important aspect.
My article in Pearls and Irritations identified changes to the Low Income Tax Offset (“LITO”) as an appropriate means of providing support for low paid workers who have been shortchanged in a tax package that focuses on “middle Australia”.
The current LITO is small compared to the combined offsets under the now-abolished Low and Middle Income Tax Offset (LMITO) and LITO. The LMITO was a short-term measure designed to increase the electoral saleability of the then Government’s proposed tax changes.
The following table illustrates the difference between the two offsets in 2021-22 and LITO now and into 2024-25.
It should be noted that an income of $50,000 per year in 2021-22 would have attracted combined LITO and LMITO offsets of $1,750, which is $1,500 per year more than the current LITO, and substantially better than the $15 per week.
No wonder lower income workers are feeling economic pain compared to several years ago.
Given the considerable costs of removing the accumulated bracket creep for low-income taxpayers, it must be accepted that there can be no remedy to this situation in any one year. But a start should be made through a modest adjustment of the LITO.
The purpose of a low-income tax offset is to provide a degree of taxation equity to low-income taxpayers that is not available through the income tax thresholds and marginal tax rates. There are three key variables, leaving aside budgetary capacity, in designing a low-income tax offset: quantum, the income level from which the offset is phased out, and the rate at which it is phased out. It is a preferable means of targeting the low paid than changing the tax thresholds because a change in the tax thresholds will be carried through to higher income earners.
The following table contains three increases in LITO, increasing it to $1,000, $1,100, and $1,200. Each has the full amount being payable at $30,000. In the first option the phase-out, or taper, rate is 1.5%, in the latter two it is 2%. At $50,000 the annual increase in after-tax income is valued at $450, $450, and $550, respectively.
These are small benefits for the loss that has been suffered through bracket creep and should only be regarded as a first step. They would need to be reviewed and increased over time.
The Senate should address this shortcoming in the legislation. There is plenty of scope for crossbench Senators and, possibly, Opposition Senators to pressure the Government on its treatment of low paid workers. Because The Nationals represent many of the poorest electorates in Australia, they should give close attention to the impact of taxation legislation on the low paid in their own electorates. An amendment increasing the LITO might be proposed. The legislation should be referred to a committee to consider further support for the low paid. The Senate resumes on 26 February 2024, five days before the Dunkley byelection.
The LITO is phased-out at two rates: from $37,501 to $45,000 it is phased out at 5% and from $45,001 it is phased out at 1.5%, with nil being paid at $66,667. The LITO does not offset the Medicare levy. Legislation passing the House of Representatives on 15 February 2024 raises the income at which singles start to pay a phased-in Medicare levy to $26,000.
As the tax offset is not refundable, its value to low-income taxpayers varies. At $20,000, tax before the offset will be $342, with tax payable after the offset being zero. At $21,885 the full LITO of $700 is payable. If LITO were to be set at $1,200 the offset would be fully used at $24,516. Above that level, none of the proposed LITO levels would reduce the tax to zero.
Brian Lawrence
Brian Lawrence LL.B. M.Ec. prepared submissions and appeared on behalf of the Australian Catholic Bishops Conference and agencies of the Catholic Church in the national annual wage reviews from 2003 to 2019. He is a former barrister and was a Deputy President of the Industrial Relations Commission of Victoria, the functions of which have been transferred to national tribunals.
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