BILLS DIGEST NO. 12, 2016–17              14 September 2016

Treasury Laws Amendment (Income Tax Relief) Bill 2016

Kali Sanyal
Economics Section 

Date introduced:  1 September 2016
House:  House of Representatives
Portfolio:  Treasury
Commencement: The day the Act receives Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at September 2016.

Glossary

Table 1: Abbreviations and acronyms

Abbreviation or acronym

Definition

ATO

Australian Taxation Office

Commissioner

Commissioner of Taxation

ITRA 1986

Income Tax Rates Act 1986

Source: Explanatory Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016

Purpose of the Bill

The purpose of the Treasury Laws Amendment (Income Tax Relief) Bill 2016 (‘the Bill’) is to increase from $80,000 to $87,000 the threshold at which an individual’s marginal tax rate increases from 32.5 per cent to 37 per cent. The changes apply to both resident and non-resident individual tax payers, with effect from 1 July 2016.

Structure of the Bill

The Bill contains only one Schedule that amends the Income Tax Rates Act 1986 (ITRA 1986).

Background

Bracket creep is ‘a situation where inflation pushes income into higher tax brackets’.[1] Bracket creep causes average tax rates and income tax collections to rise.[2]

Deloitte Access Economics conducted an analysis of the effect of ‘bracket creep’—or ‘fiscal drag’—on the budget bottom line. They said:

Australia’s progressive personal income tax system is based on marginal rate thresholds that are fixed in dollar terms, meaning government revenues benefit from fiscal drag as higher wages gradually drive individual taxpayers into higher marginal tax brackets over time.

Wage growth means, even when governments do nothing, average rates of personal income tax go up over time, helping to lift the tax take.

Unlike other types of Budget repair, bracket creep doesn’t require any action by governments. That makes it a politically attractive choice to raise extra revenue. However, fiscal drag is also an ugly, ungainly and unfair way to raise taxes. For example, in just a few short years, workers on average full-time incomes will see their average tax rate back where it was before the GST was introduced.

Overall revenue gains from bracket creep can be divided into two components:

A nominal component which occurs as wages rise with price inflation, thereby increasing average tax rates even if real wages are going nowhere

A real component, which occurs when wage rises outpace price inflation, shifting taxpayers even further into higher tax brackets. This type of bracket creep is a natural feature of a progressive income tax system.[3]

The same Deloitte analysis also found that between 2015–16 and 2018–19, the cumulative addition to Budget revenues as a result of nominal fiscal drag is projected to be running at $11 billion.[4] If income tax thresholds are not changed, the paper says:

•… there are 800,000 taxpayers with incomes between $70,000 and $80,000 (whose marginal tax rate may therefore soon jump 4.5 percentage points) [because of the bracket creep]

• Yet there are also 1.3 million taxpayers with incomes between $30,000 and $37,000 (whose marginal tax rate may therefore soon jump by 13.5 percentage points) (emphasis added).[5]

Some other recent analyses by a number of think-tanks and experts on the impact of ‘bracket creep’ suggest that its effect on taxation revenue is quite significant:

A tax analysis for the Sunday Herald Sun has revealed bracket creep — where pay packets rise due to inflation, forcing workers into a higher tax bracket — is hitting workers with a tax increase by stealth of $2.75 billion this year alone. That will rise to $13 billion a year in 2019–20.[6]

In an interview with John Daly of the Grattan Institute on 15 May 2015, the Treasury Secretary, John Fraser, noted that ‘bracket creep would account for $5.5 billion in Government revenue for 2015–16, with around $25 billion coming from bracket creep over the four years of forward estimates’.[7]

Chris Richardson, the director of Deloitte Access Economics describes ‘bracket creep’ as a stealth tax.[8] The Centre for Independent Studies (CIS) describes it the same way. The CIS analysis points out that the modelled cost to taxpayers would be about ‘$6.4 billion cumulatively from 2012–13 to 2014–15’.[9] Explaining the result of government inaction, the report estimated:

If no action is taken, Australian taxpayers will be paying $16.7 billion more in tax in 2018–19 for bracket creep since 2012–13; the cumulative cost over the six years from 2012–2013 will be $50.9 billion. Of this cost, almost 90% is due to inflation and just over 10% is due to real wages growth.[10]

Changes in marginal tax rates can offset the effects of bracket creep, however.

The Parliamentary Budget Office (PBO), in its report on Trends in Australian Government Receipts, 1982–83 to 2012–13 said:

Australia has a progressive personal income tax system, with higher marginal tax rates applying to higher incomes. In the absence of explicit government policy decisions, average tax rates and personal income tax collections increase as a result of bracket creep. Changes to the marginal tax rates and thresholds and the availability of tax offsets over the past 30 years have resulted in a 2.4 percentage point ($17.2 billion in 2012–13) reduction in the average tax rate, from 23.3 per cent in 1982–83 to 20.9 per cent in 2012–13, indicating that these tax cuts have more than offset bracket creep.[11] (Emphasis added)

Other experts agree:

Ben Phillips, principal research fellow at the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra, told Fact Check the benefits of past tax cuts were often forgotten in the bracket creep debate.

He said tax cuts under Howard and then Rudd had cancelled out the effects of bracket creep.

"So we suspect the last few years there's obviously been bracket creep but if you go back historically, we're actually better off, that is, individuals are paying a lower average rate of tax," he said.

Mr Phillips said the progressive tax system assumed that people with higher incomes and a higher standard of living paid more tax in the dollar. "But I don't think anyone can seriously say what the ideal tax rate is," he said.[12]

Changes made by the Bill

The Government announced in the Budget 2016–17 that there would be an increase in the 32.5 per cent threshold from $80,000 to $87,000:[13]

This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37 per cent to 32.5 per cent, preventing around 500,000 taxpayers facing the 37 per cent marginal tax rate. This will ensure that the average full-time wage earner will not move into the second highest tax bracket in the next three years. In the absence of this action, they would move into the second highest tax bracket in 2016–17.[14]

Committee consideration

At the time of writing, the Bill has not been referred for inquiry to any parliamentary committee.

Senate Standing Committee for the Scrutiny of Bills

The Bill has not yet been considered by the Senate Standing Committee for the Scrutiny of Bills.

Policy position of non-government parties/independents

In his Budget reply speech this year, the Opposition leader welcomed this measure and said:

Tonight Labor offers a more sustainable approach to growing the economy and making the Budget serve the interests of all Australians. We will support the government’s modest measures on bracket creep. However, in the face of continuing deficits, now is not the time to give the richest three per cent of Australians another tax cut on top of this. Now is not the time to reduce the marginal rate for individuals who earn more than $180,000.[15]

In March 2016, the Australian Greens said they would not support income tax cuts in the upcoming Budget:

The Treasurer has talked up the issue of 'bracket creep' and hasn’t ruled out income tax cuts.

Instead of frittering away billions of dollars on $5 a week tax cuts for above average income earners, we should use that money for schools, hospitals and infrastructure.

This Budget should be about reducing inequality and securing the country’s revenue base.[16]

Position of major interest groups

No substantial response to this Budget 2016 measure from any major interest group is available.

Financial implications

The measure is estimated to result in a cost to the Government of revenue of $3,950 million over the forward estimates period, as set out in Table 2.

Table 2: Financial impact of extending the threshold of tax bracket from $80,000 to $87,000, $m

2016–17

2017–18

2018–19

2019–20

$m

-$800

-$950

-$1,050

-$1,150

Source: Explanatory Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016, p.3.[17]

Compliance cost

The measure is a modification of the currently applicable tax schedule, so there will be no compliance cost impact on taxpayers.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[18]

Key issues and provisions

The Bill amends the ITRA 1986.

Schedule 7 of the ITRA 1986 sets out general rates of income tax. Part I of Schedule 7 sets out income tax rates for resident taxpayers, while Part II sets out income tax rates for non-resident taxpayers. Tables in clause 1 of each Part set out the tax rates for ordinary taxable income for each group, as follows:

Table 3: Tax rates for resident taxpayers

Item

For the part of the ordinary taxable income of the taxpayer that:

The rate is:

1

exceeds the tax-free threshold but does not exceed $37,000

19%

2

exceeds $37,000 but does not exceed $80,000

32.5%

3

exceeds $80,000 but does not exceed $180,000

37%

4

exceeds $180,000

45%

Source: Income Tax Rates Act 1986.[19]

Table 4: Tax rates for non-resident taxpayers

Item

For the part of the ordinary taxable income of the taxpayer that:

The rate is:

1

does not exceed $80,000

The second resident personal tax rate

2

exceeds $80,000 but does not exceed $180,000

37%

3

exceeds $180,000

45%

Source: Income Tax Rates Act 1986.[20]

Items 1 and 2 of Schedule 1 amend Clause 1 of Part I of Schedule 7, table items 2 and 3 of the ITRA 1986 respectively, replacing the amount ‘$80,000’ with ‘$87,000’. Items 3 and 4 of Schedule 1 amend Clause 1 of Part II of Schedule 7, table items 1 and 2 of the ITRA 1986 respectively, replacing the amount ‘$80,000’ with ‘$87,000’.

Retrospectivity

Item 5 of Schedule 1 provides that the amendments will apply to the 2016–17 year of income as well as later years.

In view of the retrospectivity of the measure, the Government pointed out:

The Australian Taxation Office (ATO) will issue new income tax withholding schedules once the Commissioner of Taxation (Commissioner) is confident that Parliament will pass these amendments. However, as these new withholding schedules will not apply until after the 2016–17 income year has started, some of the revenue impacts for the 2016–17 income year will be deferred until 2017–18 when taxpayer assessments are finalised and any overpaid income tax is refunded. That said, this deferral will not affect the total cost of the measure over the forward estimates.[21]

Conclusion

With the measure announced in the Bill, effective 1 July 2016, there will be lower marginal tax rates for individual taxpayers whose ordinary taxable income is greater than $80,000.

However, as Deloitte Access Economics points out, the measure did not offer any relief for about 1.3 million taxpayers with incomes between $30,000 and $37,000 whose marginal tax rate may jump by 13.5 percentage points by 2018–19.[22] Deloittes notes:

As more and more people are subject to higher and higher marginal rates of tax, the incentives to work are eroded. But that is particularly true for the less well-off, for whom interactions between the tax and transfer systems can produce substantial changes in take home income – if Mum works extra hours, then not only may her marginal tax rate jump if she gets a pay rise or works extra hours, but the family may also lose some family benefits or rent assistance. The less well-off are also the same group of people bracket creep is expected to affect the most.[23]

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[1].              Investopedia.com (Forbes Com), ‘Definition of ‘Bracket Creep’’, Investopedia website.

[2].              Parliamentary Budget Office (PBO), Trends in Australian Government receipts 1982–83 to 2012–13, PBO website, January 2014, (see footnote 24 in page 29).

[3].              Deloitte Touche Tohmatsu, Shedding light on the debate: mythbusting tax reform #1, Deloitte Touche Tohmatsu, Sydney, February 2016, p. 8.

[4].              Ibid., p. 9.

[5].              Ibid., p. 10.

[6].              S Maiden, ‘The great bracket creep rip-off’, Sunday Herald Sun, 10 April 2015, p. 6.

[7].              Australian Broadcasting Corporation (ABC), ‘Fact file: how much extra tax are Australians expected to pay because of bracket creep?’, ABC News, 26 June 2015.

[8].              Ibid.

[9].              R Carling and M Potter, Exposing the stealth tax: the bracket creep rip-off, Research report, 8, 2015, Centre for Independent Studies (CIS), St Leonards, December 2015, p. 1.

[10].              Ibid.

[11].              PBO, Trends in Australian Government receipts 1982–83 to 2012–13, op. cit., p. 29.

[12].              ABC News, ‘Fact file: how much extra tax are Australians expected to pay because of bracket creep?’, op. cit.

[13].              Australian Government, Budget measures: budget paper no. 2: 2016–17, p. 42.

[14].              Ibid.

[15].              B Shorten, ‘Second reading speech: Appropriation Bill (No. 1) 2016–2017’, House of Representatives, Debates, 5 May 2016, pp. 4620–25.

[16].              The Greens, Greens to oppose income tax cuts & company tax cuts for big business, media release, 23 March 2016.

[17].              Explanatory Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016, p. 3.

[18].              The Statement of Compatibility with Human Rights can be found at page 9 of the Explanatory Memorandum to the Bill.

[19].              Income Tax Rates Act 1986.

[20].              Ibid.

[21].              Explanatory Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016, op. cit., p. 3.

[22].              Deloitte Touche Tohmatsu, Shedding light on the debate: mythbusting tax reform #1, op. cit., p. 10.

[23].              Ibid., p. 11.