Budget’s $1500 cash bonus ‘cynically’ hides tax breaks for wealthiest Australians

This week’s pre-election budget contained billions of dollars in sweeteners and cost-of-living measures – but experts say the $1500 handout hides a “cynical” truth.

Last week’s pre-election budget contained billions of dollars in sweeteners and cost-of-living measures – but experts say the $1500 handout hides a “cynical” truth.

Under the turbocharged low and middle income tax offset (LMITO), more than 10 million Australians earning less than $126,000 a year will receive an additional one-off $420 cost-of-living tax offset, in addition to the existing $1080.

“Individuals already receiving the low and middle income tax offset will now receive up to $1500 and couples up to $3000 from July 1 this year,” Treasurer Josh Frydenberg said in his budget speech on Tuesday night.

The LMITO, often referred to as the “lamington”, was first introduced by then-Treasurer Scott Morrison in 2018 under the government’s stage one tax cuts. It has already been extended twice, and government ministers had debated for months on whether to extend the tax break a third time or let it expire on June 20.

Since taxpayers will still receive the offset when they file their returns this year anyway, Mr Frydenberg opted to let the lamington go out with a bang, turbocharging payment for one last hurrah.

“It’s a consequence of cynical politics,” said Dr Richard Denniss, chief economist with the Australia Institute.

Treasurer Josh Frydenberg at Geelong Flower Farm in Moolap. Picture: Alison Wynd

Dr Denniss said all of the cost-of-living measures the government announced on Tuesday were “one-off and temporary”, even as it moves towards the third phase of its plan to reshape the tax bracket system – in a change that will overwhelmingly benefit those on very high incomes.

“The whole point of the LMITO was to offer something modest and temporary but immediate to low and middle income earners, to conceal the fact that they were going to deliver something very generous and permanent down the track to high income earners,” he said.

“All they announced on budget night was that this year you’ll get slightly more.”

Under the stage three tax cuts, which are supported by Labor, an entire tax bracket is being removed to allow people earning from $120,000 up to $200,000 to pay less tax. When the government reaches stage three in the 2024-25 financial year, people in this bracket will get a tax cut of up to $9000 a year.

That means people earning as low as $45,001 annually – overwhelmingly represented by young Australians – will wind up paying the same tax rate as those on four times their wage.

“When stage three of the plan delivers further tax cuts in 2024-25, around 95 per cent of taxpayers will face a marginal tax rate of 30 per cent or less,” budget documents state. “This will simplify the tax system, improve incentives for working Australians and increase reward for effort.”

Australia Institute research released prior to the budget outlined how the stage three tax cuts would give bank CEOs, surgeons and federal politicians a tax cut of $9075, while those on low incomes like aged care workers, disability careers and hairdressers would get nothing.

“Stage three delivers enormous $9000 tax cuts for people earning high incomes while removing the lamington means taxes are going up for millions of Australians – it really is as simple as that,” Dr Denniss said.

“In Australia as your income rises the tax rates you pay on your extra dollar of income rise, and the stage three tax cuts involve a cut to the top tax bracket, which means that only a very small number of people benefit. Most people don’t earn anywhere near enough to pay the top tax rate, so when you cut that top tax rate you deliver a lot of money to those people who earn the most.”

People on low incomes won’t benefit from the stage three tax cuts. Picture: Glenn Hampson

Even the lamington is not all it is cracked up to be, however, with research from the ANU earlier this year finding higher-income households were actually receiving more of the tax break.

According to the analysis, the top 40 per cent of households by income had their overall earnings boosted by 1.6 per cent from the LMITO, compared with 0.7 per cent for the bottom 40 per cent.

“Looking at all households, the low and middle income tax offset tends to go more to middle- and high-income households than it does to low-income households,” ANU economist Ben Phillips told The Australian Financial Review.

“It does trickle up to high-income households and have more benefit for the top 20 per cent than the bottom 20 per cent.”

Economist Peter Martin, writing for The Conversation, argued it was time for the “pointless” tax break to be killed off.

Martin said the LMITO was “incredibly poorly designed, introduced for a purpose that no longer exists, extended for a purpose that didn’t make sense, and now can’t be abolished without giving people a ‘pay cut’”.

“Frydenberg’s problem is that now he has given us both the offset and the stage two together, and done it for two years, actually ending the offset will quite rightly be seen as a tax increase or a ‘pay cut’, directed at low and middle earners,” he wrote.

“Costing the best part of $8 billion per year, delivered when it is not needed, and destined to continue until someone can find a way to stop it, the offset is an awfully constructed annual bonus for all but the highest-earning Australians.”

ACOSS said the budget was full of ‘temporary fixes’. Picture: David Swift/NCA NewsWire

Dr Denniss, however, said he didn’t “really buy the whole argument that the LMITO’s messy and we should get rid of it so the tax system is cleaner”.

“I think what matters is the outcome,” he said.

“If we can afford enormous tax cuts for high income earners, it seems strange to pretend we can’t afford tax cuts for low and middle income earners. It seems weird to focus on the neatness rather than the fairness of the system.”

The Australian Council of Social Services also slammed the budget, saying it ignored the “big challenges that this country faces right now, which are poverty, inequality and climate change”.

“This budget is full of temporary fixes, when we need permanent solutions,” ACOSS chief executive Dr Cassandra Goldie said in a statement.

“Much of the assistance goes to people who don’t need it, and too little goes to people who need support. The $450 one-off tax offset is overshadowed by the $16 billion annual tax cuts baked into the budget, most of which go to men on the highest incomes. The budget does nothing to lift the incomes of people with the least.”

ACOSS had previously criticised the proposed stage three tax cuts, which mainly “benefit people on $100,000 or above who have less need of support from government, and only one third of them go to women”.

“They are unfair and bad economics and should be dropped altogether,” Dr Goldie said prior to the budget.

ACOSS instead wanted to see a rise in income support payments to at least $70 per day plus indexation to wages, a 50 per cent increase to Commonwealth rent assistance and more money for social housing, among other measures.

Originally published as Budget’s $1500 cash bonus ‘cynically’ hides tax breaks for wealthiest Australians