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Background Note On Tax Changes

Further tax reductions and moving everyone to a 3-step tax scale


The changes

· middle effective rate reduced from 21c to 20c (was 28c prior to July 96)

· income at which top rate kicks in increased from $38,000 to $40,000 (was a little under $31,000 prior to July 96)

· tax scale is simplified. Low Income Rebate built into the tax scale and the same 3-step tax scale applied to everyone.


Impact of the changes

Income band $0-$9,500 with no investment income $9,500 -$40,000 $40,000+
Gain per week $0 up to $10.50 $10.50
No of people 660,000 1,800,000 520,000

· for people with less than $9,500 of income, including some investment income, the exact size of the tax cut depends on the amount of investment income (eg someone with $5,000 of wages and $2,000 of interest income would gain by nearly $2 a week. Someone who earns $9,500 exactly, made up entirely of investment income, would gain by $8 a week.)

· example: someone earning a salary of $30,000 will gain by $4 a week

· example: someone earning a salary of $35,000 will gain by $5 a week


Current system

· 2 statutory tax rates: 19.5c up to $38,000 and 33c thereafter

· the Low Income Rebate (LIR) creates a lower first tax step of 15c by giving a rebate of 4.5c on the dollar for the first $9,500 of wage/salary or benefit income

· the rebate is reduced for income between $9,500 and $38,000 at the rate of 1.5c in the dollar

· this creates a 3 step effective scale for most people:

Þ 15c up to $9,500 (19.5c - 4.5c)
Þ 21c from $9,500 up to $38,000 (19.5c + 1.5c)
Þ 33c thereafter

· someone with only investment income currently pays 19.5c from the first dollar of income. Someone with $5,000 of wages and $2,000 of interest currently pays 15c on the $5,000 of wages and 19.5c on the $2,000 of interest.

· the system is complex and many people don't know their marginal tax rate.


New system

· gets rid of this complexity by building the Low Income Rebate into the scale and applying the same 3-step scale to eveyone:

Þ 15c up to $9,500
Þ 20c up to $40,000
Þ 33c thereafter


Cost of the change

· The total cost of the move to 20c to $40,000 plus the simplification to a universal 3-step scale is approx $400m per year. Nearly all of this is the cost of lowering the effective middle rate to 20c and extending the threshold to $40,000. Moving everyone to the 3-step scale is about $10m of the total cost.

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