I’ve seen a few people parrot the line that the increase in the tax-free threshold that will take effect from 1 July this year isn’t “real”, because it involves a reduction in the Low Income Tax Offset (LITO).
Like most myths, this has a little bit of truth to it.
While references to ‘tripling the tax-free threshold’ are technically correct, the effective threshold (taking into account the LITO) is only going from $16 000 to $20 542. However, while that might sound less impressive and is certainly harder to convey in a sound bite, the increase in the tax-free threshold will still deliver a significant tax cut to low-income earners.
In fact, the new tax scales will take the effective tax-free threshold to its highest level on record (the ATO historical tables only go back to 1983, frustratingly).
Effective tax-free threshold since 1983-84, in constant 2011 dollars
Not only will the real effective threshold be higher than ever, but the 2012 change represents the largest single-year increase in the effective threshold. The second largest increase came with Wayne Swan’s first budget, in 2008-09.
Change in real effective tax-free threshold on previous year
Even if the effective threshold wasn’t changing at all – if the rise in the statutory threshold was just replacing the LITO – this would still be a positive reform in a lot of ways. A higher statutory tax-free threshold means more money in the pockets of low-income earners each week, rather than the LITO system which means that they have to wait until tax time to receive half of the LITO benefit.
In short, the change in the tax scales will deliver a meaningful benefit to those on low incomes.
Note: Effective TFT = statutory TFT + (LITO amount/lowest MTR).
A very helpful post, Matt.
The ‘myth’ seems to have a fair amount of backing, including from you in this disucssion, and is rather more accurate than the lie that is a tripling of the tax free threshold. In any event from memory the benefit is being paid for by the early cut out of LITO for workers in the next bracket and after. Is that right?
John,
It’s true that the effective threshold is not being tripled, even though the statutory threshold is being tripled. However, as I show in the post, the 1 July changes will nevertheless deliver the largest real boost in the effective threshold for at least thirty years. Replacing LITO with an increased statutory threshold also helps boost the weekly take-home pay of low-income earners, as I explain in the post.
The boost in the statutory TFT nets out to zero at an income of $80 000. All individuals with incomes below that level will receive a personal income tax cut from 1 July.
[...] of the carbon price package on effective tax rates at the lower end will be modest but important. I’ve already established that the changes represent the largest real boost to the effective tax-free threshold in at least [...]
Problem is, the carbon tax was introduced for the companies to pay for pollution, that is not going to happen, they will not pay a cent. It is 100% passed on to the consumer which is now getting refunded by the government. So they again have not paid ANYTHING, the consumer is, the lower income people are getting some back sure, so who is paying? The high income earner, again NOT the companies who pollute. It is beyond a joke.