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Tax Reform

Under a smokescreen (excuse pun) of Carbon Price Initiatives the federal government has announced tax reforms. What does the word reform mean? In a religious sense we expect it means some bad people or things are getting better - or if we were watching marching girls or a band display, it means some people are changing in dazzling patterns and coming out of it looking exactly the same! Once again it is the latter that government is doing with tax reform.

Firstly lets look at the tax free threshold of $6000. This has been spectacularly increased to $18,200 from the 2013 tax year. Except for accountants and tax lawyers (and treasury) people would think this a major improvement. It's really just a cosmetic catch up for the lack of indexation of the $6000 from when it was introduced, a defect which has been dealt with in a more complex way recently by a Low Income Tax Offset. The current workings of tax mean a person earning $16,000 pays no tax. So the change to $18,200 is little more than another couple of years indexation effect on the $16,000. However the change is a good one in that it returns the tax free threshold to it's original intent - the bare minimum income people need to sustain themselves which is around 25% of Average Earnings and the Single Person Age Pension. See our miscelaneos chart highlighting the restoration of this level - it's only taken 30 years to fix! http://www.findem.com.au/news/taxthresholdawe.png

Now to the general tax brackets of $37,000, $80,000 and $180,000 - these will NOT be indexed and will stay the same through to 2016. This leads to bracket creep year by year as inflation moves on and more tax is collected in higher brackets. See our Bracket Creep calculator in Tax Calculators under Research Centre. We have also added the new income tax scales to Tax Calculator.

The worst part of current income tax rules is the tyranny imposed on older people and lower income people. To understand what their tax position is there are numerous thresholds and adjustments to deal with. Whilst they pay little tax, the spin like today's announcements sends them back through the loops to work this out. It is a stress these people don't need to budget for future finances particularly when all income is spent and little in the way of reserves exist. Despite Henry and Hamer reviews we are no further ahead in having a simple way of communicating what tax these people pay. Paradoxically the high fliers have little difficulty with knowing tax on income - all they need to remember is the top marginal rate!

Posted Monday, 11 July 2011

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