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Home > Our Publications > Australian Outlook> 2006 > July

Plenty of winners in Budget

THE biggest cuts to personal tax since the introduction of the GST are the centrepiece of Peter Costello's $48 billion budget giveaway to singles, families, businesses and retirees.
The cuts to personal tax are worth $36.7 billion over four Years, and deliver the Howard Government's first -ever reduction in the top personal ta.x rate, from 47c to 45c. The secondhighest rate will fall by 2c, to 40c.
A high-income earner on $150,000 a year will pocket an extra $119.23 a week from July 1, comprising a tax cut of $74.23 a week and another $45 still to be paid from last year's budget
The Treasurer has also fiddled with the thresholds for the 15c and 30c rates most workers face.
Mainstream voters with the least to show are singles on wages between $40,000 and $60,000. The changes to the 15c and 30c tax thresholds are worth just $9.81 a week to this bloc.
Mr Costello has shared the revenue bounty with lower-income earners' by boosting a previously overlooked, Paul Keating-era tax break, to deliver an extra $7.02 a week for someone on $20,000 a year.
The so-called low-income tax offset had been $285 a year for those earning up to $21,600, with a diminishing amount going to those on up to $24,475.
These changes will increase the maximum payment to $600 for those on up to $25,000 and expand the list of partial recipients to $40,000. This end of the income ladder is dominated by mothers who are working parttime and lower-income singles.
Families with children will receive a further $1.5 billion over four years. The Treasurer said a household on $40,000 would receive $27.79 a week in additional family tax benefits.
But, when compared against the $36.7 billion in cuts to personal tax, the boost to family payments is relatively minor.
By contrast, the 2004 election budget contained $19.2 billion in family payments versus $14.7 billion in ruts to personal tax.
The politics behind the budget is "tax cuts for all".
The policy rationale is to encourage more mothers into the workforce and get older Australians to defer their retirement plans. The surprise in the budget was the reform of superannuation taxes.
Mr Costello said he will scrap all levies on payouts - lump sums and annual super pensions - but only if the nest egg is accessed when a retiree turns 60.
The old exit taxes will still apply to those who take their money between the ages of 55 and 59, and to public servants and politicians in defined benefit funds.
This is another first, because past Costello budgets had exempted politicians from higher super taxes.
Under the new plan, the cap on how much super that people can hold will be abolished and replaced with a $50,000 limit on yearly contributions.
Mr Costello said the new rules will be finalised after consultation and take effect from July 1 next Year. The Government has set aside $62 billion over three years to fund the incentives for savings.
Once the changes are bedded down, super will be taxed just twice - 15 per cent on the contributions, and 15 per cent on the earnings of super funds.
"This plan represents the most significant change to Australia's superannuation svstem in decades," Mr Costello said.
"It will sweep away the current raft of complexity faced by retirees, increase retirement incomes, give greater flexibility as to how and when superannuation can be drawn down and improve incentives for older Australians."
Business received a $3.7 billion handout over four years, under measures to bring depreciation rules into line with world practice.
The new personal tax scales set the low-income rate of 15c on every dollar earned between $6001 and $25,000 a year, while the general rate of 30c will apply to earnings up to $75,000. These thresholds are, respectively, $3400 and $5000 above the old benchmarks.
The new upper midd1e-income rate of 40c will cut in between $75,001 and $150,000, leaving the new top rate of 45c for those on more than $150,000, Mr Costello said the new scales will leave just 2 per cent of taxpayers facing the top rate, compared with 3 per cent under last year's budget.