The $18,200 tax-free threshold should be scrapped in favour of new tax brackets linked to a person’s average weekly earnings, under a proposal put forward by professional services giant KPMG.
The plan, which would create four personal income tax bands to replace the existing five, is aimed at tackling bracket creep and the government’s reliance on what federal Treasurer Joe Hockey has called a “narrow” revenue base.
Under KPMG’s plan, Australians earning $27,000 a year or less would be slugged with a 15% personal income tax rate in order to encourage them into full-time work, according to Fairfax.
The second tax band would see those earning between $27,000 and $80,000 pay a 25% tax rate, while people earning up to $160,000 would pay personal income tax of 35%.
The fourth and highest tax band would mean Australians earning more than $160,000 a year would pay a tax rate of 45 cents to the dollar.
The four personal income tax bands are based on average full-time earnings, which currently sit at around $80,000 a year in Australia.
Joe Hockey has previously indicated a willingness to overhaul Australia’s income tax brackets, saying the federal government’s revenue is “subject to unsustainable risk” if too many people slip from the highest tax brackets.
The top 10% of Australian taxpayers pay nearly half of all income tax collected by Canberra.
However, the Treasurer is yet to outline how he proposes to fix what he sees as a significant problem.
Leon Mok, executive director at the tax consultant division Partner Partners, told SmartCompany the KPMG proposal is a good first step given the issues to come out of the intergenerational report.
“If the goal is to ensure that we are less reliant on personal income tax in the future, we need to design our whole tax system with that in mind,” Mok says.
“A lot has been made about the linking of personal tax rates to average income earnings. That is obviously something that is high on the fairness scale. But on that front we’ve got to be a little careful that we don’t make things too complex. Because they’re linking it to a set of ABS figures, the thresholds with the nice round figures look nice as a start, but those figures are going to change over time.”
Mok says if the government is going to reform personal income tax, it needs to look at reforming the overall taxation system.
“You have to look at personal tax reform in the prism of all taxes, including payroll tax,” he says.
“Mucking around with a personal tax threshold has an effect on a lot of different parts of the tax regime.”