Tackling the Cost-of-Living Crisis: How the tax bracket adjustment aims to bring Relief to Australian Households!

Click on the link below to learn about the summary of inflation trends in Australia!

Post-COVID Inflation in a Nutshell

Decoding economic jargon: a beginner's guide to CPI and WPI. The cost-of-living crisis refers to the increasing difficulty faced by households in meeting their daily expenses due to rising prices for goods and services. This is usually measured through the consumer price index and the wage price index. Consume Price Index (CPI) measures the change in prices for a basket of goods and services that the average Australian household buys. This basket is made up of products like food, healthcare, clothing etc. When the prices of these goods and services goes up, so does the CPI, which indicates higher inflation in the economy, meaning the household needs more money to buy the same goods and services. On the other hand, the Wage Price Index (WPI) measures the average changes in the cost of labour, or wages, over time. If the WPI is increasing, then the average wages (without accounting for changes in other factors like working hours or composition of work) is also increasing. If the CPI is greater than WPI, then inflation is outstripping wage growth. This means that households have to pay more to purchase their usual goods and services, but they are not earning more. Take, for example, the growth in CPI in one year is 5% and growth in WPI is only 2%. This means that your groceries are now 5% more expensive, but you are only earning 2% more income, causing you to face difficulty whilst buying these goods and services. And there you have it - that is why we are currently living in a cost-of-living crisis!

Figure 1: CPI vs WPI

Check out that graph up there! The CPI has been consistently higher than the WPI from 2022 until just recently in March 2024, and by a really big margin too. This is the reason behind Australia's cost-of-living crisis, which is hitting the average Aussie household hard. To tackle this problem, the Albanese Government, with support from Treasurer Jim Chalmers, has made some changes to the stage three tax brackets. Here's a breakdown to help you grasp what this means for you!

Tax Brackets are set to change!

From July 1, you can expect your taxation levels to substantially decrease under the new tax brackets.

Most of the changes in tax brackets will definitely help out folks with lower to middle incomes, like we talked about earlier. Now, let's take a closer look at these changes from different angles.

Raj earns $45,000 per year and is a resident in Australia for the entire financial year.

Raj expects to pay $5,667 in taxes for this financial year, which then decreases to $4,863 from July 1 onwards. This saves Raj $804 in tax liabilities as a result of the tax bracket changes.

Adam earns $75,000 per year and is a resident in Australia for the entire financial year.

Adam is expected to have an estimated annual tax liability of $16,342 for this year. However, in the financial year 2024-25, he is expected to hold an annual tax liability of only $14,788. This means Adam receives a tax cut $1,554 through the changes in the tax brackets.

Lisa earns $200,000 per year and is a resident in Australia for the entire financial year.

Lisa expects to pay $64,667 in taxes for 2023-24, but only $60,138 in taxes for 2024-25. This means she saves $4,529 in taxes for next year!

What is very interesting to understand, however, is that the labour party has diverted the benefits that were intentionally aimed at high-income earners towards low-income earners. The original stage three tax cut was aimed to entirely abolish the 37% tax bracket and provide a large benefit to high-income earners. However, this new tax bracket will benefit those who need it most. Those who are struggling to make ends meet and enjoy that once a month dinner out.

The average Aussie is getting an extra $1,888 a year in tax cuts, which works out to around $36 a week. This boost in income is great for families to cover their basic needs. Plus, there's a $300 energy bill relief program and a 10% increase in Rent Assistance to ease financial pressures. It seems like the Albanese government is trying to help out households during this tough time. But could it also be a strategic move with the elections coming up next year?

Let us know ASAP! We can't wait to hear your thoughts or answer any questions you may have! Get in touch with us right away via email at info@vosix.com.au and receive personalised responses to all your inquiries. Our team is dedicated to assisting you and empowering your financial literacy - one insight at a time!