The Federal election is just around the corner, with taxation policy one of the key factors likely to influence peoples' decision. There are both huge similarities and stark differences between the Coalition and Labor when it comes to tax policy, with winners and losers on both sides of the political spectrum. Let's take a look at the key differences between parties and analyse how the proposed tax changes will influence you in the months and years ahead.
Taxation reform was the centrepiece of the Coalition's recent budget announcement, with Treasurer Josh Frydenberg announcing $158 billion in income tax relief. The Labor party has also signalled a range of tax cuts in the lead-up to the election, although unlike the Coalition, their tax reductions are unlikely to reach the top-end of town. Instead, Bill Shorten has promised extended tax relief for the lowest-paid workers, with the 3.7 million Australians earning less than $40,000 a year set to receive a tax offset up to 30 percent higher than the Coalition.
While Labor are promising more for people in the bottom tax bracket, there is very little difference between the parties when it comes to middle-income earners, which is where the vast majority of Australians reside. Regardless of who wins in May, all Australians earning between $48,000 and $90,000 a year will benefit from a $1080 tax offset, which will be applicable almost immediately as part of your 2018-19 tax return. If you're in the upper-middle range and earn more than $90,000 but less than $126,000, you’ll also benefit but at a reduced amount.
Despite the immediate similarity between the parties when it comes to middle-income tax policy, there are some significant differences which may become real in a few years time. The Coalition wants to flatten tax brackets and reduce the marginal tax rate by 2024, which will put everyone earning between $50,000 and $200,000 in the same boat. Along with simplifying taxation by eliminating key levels in the current progressive tax system, the Coalition are also promising to reduce the tax rate in this large bracket from 32.5 percent to 30 percent.
By comparison, Labor wants to keep the tax rate and income brackets at their current levels, with high-income earners taking a bigger tax burden than middle-income earners as a proportion of their income. Research from The Australia Institute has shown that 34 percent of the Coalition tax benefit will go to the top 10 percent of taxpayers, with 54 percent going to the top 20 percent, and only 3 percent going to the bottom 20 percent of income earners.
According to the Institute's senior economist Matt Grudnoff, "Flattening income tax reduces the tax take from high-income earners, which ultimately means either fewer government services or high taxes on middle and low-income earners if the government wants to maintain a surplus... If this income tax plan comes into effect, it will mean that in the future those on higher incomes will pay less tax as a proportion of their income and the amount of income tax collected will be far less."
While the Australia Institute is a left-leaning organisation, and the top-end of town will still pay markedly more tax in real dollar terms, flattening the tax landscape over time vs keeping the current levels in place is where the real difference between the parties lies. Labor also has plans to scrap negative gearing on property investments bought after January 1, 2020, and eliminate franking credit refunds for self-funded retirees. At the end of the day, the Coalition seem intent on lowering taxes, with Labor putting more emphasis on spending for education and health services.