[Australia] Taxes of middle income Australians to hit 20-year high

The problem is that their income in real terms is likely to be either be flat or falling over the next five years.

The taxes of more than a million Australians will hit a 20-year high by 2021 as the rising salaries of middle-income earners push them into higher tax brackets – even though their income in real terms is flat or falling.

The Parliamentary Budget Office indicated that the average tax rate will increase by 2.3% over the next five years, affecting at least 1.6 million citizens who will have to pay A$2,000 (US$1,530) more per year in tax.

“The largest increase is expected to be faced by individuals in the middle income quintile, whose taxable income is expected to average A$46,000 (US$35,226) in 2017-2018,” the Budget Office said. “Their average tax rate is expected to increase from 14.9% to 18.2%.”

The issue is that, without government intervention, the levels at which citizens are taxed will remain fixed, even though their salaries rise with inflation. As a result, they are pushed into higher tax brackets without necessarily earning more in real terms.

But the Sydney Morning Herald believes that the Budget Office’s assessment is now likely to set the stage for pre-election personal tax cuts as early as next year.

In July 2016, Treasurer Scott Morrison made the first significant change to tax brackets since 2007 when he increased the middle tax bracket threshold – where people pay A$0.37 (US$0.28) on the dollar in tax – from A$80,000 (US$61,208) to A$87,000 (US$66,566). The move meant at the time that about 500,000 people did not have to move into that tax bracket, but the Budget Office now predicts that up to 900,000 people will do so.

Another impact on average tax rates is also expected to come from an increase in the Medicare Levy for healthcare from 2019-20. It will hit people in the third, fourth and fifth highest tax brackets particularly hard.