Bills Digest no. 12,
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Table 1: Abbreviations and acronyms
Purpose of the Bill
Structure of the Bill
Changes made by the Bill
Senate Standing Committee for the
Scrutiny of Bills
Policy position of non-government
Position of major interest groups
Table 2: Financial impact of
extending the threshold of tax bracket from $80,000 to $87,000, $m
Statement of Compatibility with Human
Key issues and provisions
Table 3: Tax rates for resident
Table 4: Tax rates for non‑resident
Date introduced: 1
House: House of
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
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
All hyperlinks in this Bills Digest are correct as
at September 2016.
Abbreviations and acronyms
| Abbreviation or acronym
||Income Tax Rates
Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016
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.
of the Bill
The Bill contains only one Schedule that amends the Income Tax Rates
Act 1986 (ITRA 1986).
Bracket creep is ‘a situation where inflation pushes
income into higher tax brackets’.
Bracket creep causes average tax rates and income tax collections to rise.
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
A nominal component which occurs as wages rise with
price inflation, thereby increasing average tax rates even if real wages are
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.
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.
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).
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.
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
Chris Richardson, the director of Deloitte Access
Economics describes ‘bracket creep’ as a stealth tax.
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’.
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.
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
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.
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:
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.
At the time of writing, the Bill has not been referred for
inquiry to any parliamentary committee.
Standing Committee for the Scrutiny of Bills
The Bill has not yet been considered by the Senate Standing
Committee for the Scrutiny of Bills.
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.
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.
major interest groups
No substantial response to this Budget 2016 measure from
any major interest group is available.
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
Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016, p.3.
The measure is a modification of the currently applicable
tax schedule, so there will be no compliance cost impact on taxpayers.
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.
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
|| For the part of the
ordinary taxable income of the taxpayer that:
|| The rate is:
||exceeds the tax‑free threshold but does not exceed
||exceeds $37,000 but does not exceed $80,000
||exceeds $80,000 but does not exceed $180,000
Source: Income Tax Rates
Table 4: Tax
rates for non‑resident taxpayers
For the part of the
ordinary taxable income of the taxpayer that:
The rate is:
does not exceed $80,000
The second resident personal tax rate
exceeds $80,000 but does not exceed $180,000
Source: Income Tax Rates
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
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.
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.
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.
(Forbes Com), ‘Definition
of ‘Bracket Creep’’, Investopedia website.
Budget Office (PBO), Trends
in Australian Government receipts 1982–83 to 2012–13, PBO website,
January 2014, (see footnote 24 in page 29).
Touche Tohmatsu, Shedding
light on the debate: mythbusting tax reform #1, Deloitte Touche
Tohmatsu, Sydney, February 2016, p. 8.
great bracket creep rip-off’, Sunday Herald Sun, 10 April 2015, p. 6.
Broadcasting Corporation (ABC), ‘Fact
file: how much extra tax are Australians expected to pay because of bracket
creep?’, ABC News, 26 June 2015.
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.
Trends in Australian Government receipts 1982–83 to 2012–13, op. cit., p. 29.
News, ‘Fact file: how much extra tax are Australians expected to pay because of
bracket creep?’, op. cit.
measures: budget paper no. 2: 2016–17, p. 42.
reading speech: Appropriation Bill (No. 1) 2016–2017’, House of
Representatives, Debates, 5 May 2016, pp. 4620–25.
to oppose income tax cuts & company tax cuts for big business, media
release, 23 March 2016.
Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016, p. 3.
Statement of Compatibility with Human Rights can be found at page 9 of the
Explanatory Memorandum to the Bill.
. Income Tax Rates
Memorandum, Treasury Laws Amendment (Income Tax Relief) Bill 2016, op. cit., p.
Touche Tohmatsu, Shedding light on the debate: mythbusting tax reform #1, op.
cit., p. 10.
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