Millions of Aussies set for final tax offset of $1,500

At Tuesday night's Federal Budget announcement, Treasurer Josh Frydenberg said low to middle income earners will see a $420 tax offset to ease cost of living pressures.

The increase is estimated to benefit more than 10 million income earners, and applies to those earning incomes up to $126,000.

Those earning between $48,000 and $90,000 will see the biggest benefit, yielding up to $1,500 in individual savings for their 2021-22 tax returns.

However, unlike what the rumour mill suggested, the LMITO - in place since 2018-19 - will not be extended past this financial year.

Mark Chapman, director of H&R Block's tax communications, said this is effectively a tax hike in disguise.

"Unfortunately, this is just a short-term measure. Next year, the low and middle-income tax offset disappears completely - meaning that people earning up to $126,000 will see a tax rise of up to $1,080," Mr Chapman said.

"It's hard to see how that will do anything to help cost of living pressures over the medium and long term.

"Worse, just as most Australians will see this tax rise, the wealthiest Australians will be anticipating a tax cut of up to $9,075 in 2024-25."

Mr Chapman is referring to the proposed income tax changes for the 2024-25 financial year, which involves:

• Eliminating the 37c bracket
• Cutting the 32.5c bracket to 30c, and having it apply to incomes from $45,000 to $200,000
• Bumping the 45c bracket threshold from $180,000 to $200,000

Eligible welfare recipients will also receive a one-time $250 payment.

The Federal Government doesn't expect a budget surplus in the next 10 years.

AMP Capital Chief Economist Shane Oliver described it as "very much a pre-election Budget, with few direct losers and lots of winners."

"The pre-election cash splash risks overstimulating the economy at a time when it is already strong, further adding to inflationary pressures and adding to the amount by which the RBA will have to hike interest rates," Dr Oliver said.

"At some point tough decisions are likely to be required either to reduce spending as a share of GDP or raise taxes."

However since 2014 the percentage of taxes taken from individuals compared to other revenue streams has increased according to the Taxation Commissioner.

The average share of all taxes paid by individuals over the past six financial years was 53.5%; from 2007 to 2012 it was 47.3% on average.

Australia also records substantially higher tax revenues from personal income than the OECD average at 42% compared to 23% as of 2019.

ANZ economists also said spending at a time when the economy is strong poses some risks.

"The Government has announced almost $40 billion of new spending  across the five years from 2021-22. This is quite a bit more than we expected," the economists said.

"Importantly, more than half is set to occur in the current financial year and 2022-23. This adds to demand at a time when the economy is already strong."

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Photo by Christina @ wocintechchat on Unsplash