Budget 2020: Early tax cut puts millions in the money

More than 11 million Australians will pay thousands of dollars less in tax this financial year.

More than 11 million Australians will pay thousands of dollars less in tax this financial year after the Morrison government brought forward the second stage of its tax cuts by two years to July 2020, in a move Josh Frydenberg said would boost the economy by $12.5bn and create an additional 50,000 jobs.

“Australians will have more of their own money to spend on what matters to them, generating billions of dollars of economic ­activity and creating 50,000 new jobs,” the Treasurer said. “As they spend their tax cuts, this will also help local businesses to keep their doors open and hire more staff.”

Framing the tax cuts as a stimulatory measure that will help the economy recover from the COVID-19 crisis, Mr Frydenberg said “the greatest benefits will flow to those on lower incomes”.

Prime Minister Scott Morrison listens as Treasurer Josh Frydenberg delivers the budget in the House of Representatives. Picture: Getty

Australians earning $40,000 will pay more than a fifth less tax this year than they would have in 2017-18 before the first round of the legislated income tax plan.

Those on $80,000 will pay about 11 per cent less tax.

The second of the three-step legislated personal income tax plan increases the top threshold of the 19 per cent income tax bracket from $37,000 to $45,000, while the 32.5 per cent tax rate will kick in at $120,000, instead of $90,000.

The low and middle income tax offset (LMITO) — worth up to $1080 a year for singles and twice that for dual-income households — was to be removed in stage two of the plan in lieu of the permanent changes in the lower and middle income tax brackets.

Instead, it will be retained in 2020-21 as a “one-off benefit”, the budget papers revealed, while the low income tax offset will ­increase from $445 to $700.

The maximum benefit from the LMITO is received by those with taxable income of between $48,000 and $90,000.

Accelerating the second stage of tax cuts and retaining the tax offset would hand single low- and middle-income earners a tax cut worth $2745 compared to 2017-18, while dual-income families will receive tax relief of up to $5490.

More than seven million Australians are expected to receive tax relief of $2000 or more for the 2020-21 financial year, compared to the 2017-18 tax settings.

Faced with intense criticism ahead of the budget that accelerating the remaining legislated tax relief would largely benefit wealthier Australians who would be more likely to save than spend the additional cash, the Morrison government was at pains to highlight the immediate economic dividend of lower taxes.

Treasury estimates that easing the tax burden on Australians would hand the economy a significant $3.5bn boost in 2020-21, and add $9bn to GDP in 2021-22. It would also create an additional 50,000 jobs.

“Improved confidence and greater consumption will support businesses, creating opportunities to increase hiring and undertake further investment,” the budget papers say.

The tax announcements in Tuesday’s budget will cost an ­additional $12.5bn this financial year — on top of the $8.1bn in tax relief already delivered under stage one — and an extra $17.8bn over the forward ­estimates period.

Stage three of the plan, which will introduce a 30 per cent tax bracket between $45,000 and $200,000, will be implemented from July 2024 as planned.