Now that the first phase of the largest income tax cuts in Australian history is in place, what immediate effect will it have on you and in the years to come? Here’s an overview of what the tax bracket changes mean for everyday Australians.
Your take-home income
Phase one of the income tax cuts started on 1 July and are directed at low-middle income earners who are earning up to $125,000 a year. This four-year Low and Middle Income Tax Offset (LMITO) plan is a refund that will come at the end of the year once you file your tax return. Around 4.4 million Australians that earn between $48k and $90k will get a maximum refund of $530.
Also starting 1 July, the ceiling on the tax bracket that ended at $87k has now increased by $3,000. The new $90k threshold means more dollars will be taxed at 32.5%.
This will also benefit high-income earners because they will pay less tax on that part of their salary. The $3,000 part of their income that was taxed at 37% will now be taxed at 32.5%.
Preventing ‘bracket creep’ in 2022
In July 2022, the government plans to fix the bracket creep where some workers find themselves straying into higher tax brackets because of inflation, even though their cost of living is also rising. The 32.5% tax bracket ceiling, which is now at $90k, will increase to $120k. The ceiling on the lower 19% tax bracket will also rise from $37k to $41k in 2022.
This will mainly benefit upper-middle and high earners who are earning from $120,000 a year upwards. They get to keep an extra $2,025 of their pay.
This underlines how a change in the lower tax thresholds will benefit the high earners more. Not only will they receive tax cuts on their first $37k – $41k of income, their earnings that fall into the $90k – $120k bracket will also get tax reductions.
However, the changes in 2022 will also have a positive effect on low and middle-income earners. Their maximum refund of $530 will increase to $645.
The controversial 2024 income tax cut
On 1 July 2024, phase three of the income tax plan will start and will be the biggest change to the current tax system. The present 37% tax bracket will be replaced by a one big middle tax bracket of 32.5% for those earning between $41,000 – $200,000.
Once this takes effect, 94% of Australian workers will pay no more than 32.5% on any dollar they earn.
As with previous changes to the tax brackets mentioned, this will also benefit upper-middle and high earners. For those earning more than $200k a year, they will pay less tax on a large portion of their income. Upper-middle and high earners get to have a 4.5-cents-in-the-dollar tax relief on earnings between $120,001-$180,000 and a 12.5-cents-in-the-dollar tax cut on income between $180,001-$200,000. This will add $7,225 a year to their take-home income.
In general, the personal income tax cuts are a boost to Australian households. It will put more money in the hands of Australian workers. You will also be better rewarded for your efforts in working, saving, and investing.
If you need any assistance with your income tax obligations, contact a Chan & Naylor accountant near you, and we’ll be more than happy to help.
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Chan & Naylor Group has nationwide offices in North Sydney, South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with your income tax as well as any property tax or business tax enquiry that you may have. Contact us today.