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New tax cuts could put thousands back in your family's pocket

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More than 11 million low and middle income earners are set to save thousands in future and backdated tax, in what is one of the key pillars of this year's historic Federal Budget.

Previously announced "stage two" tax cuts, originally slated for the 2022-23 financial year, will be brought forward and backdated to July 1, 2020.

This will see the low income tax offset increase from $445 to $700, the 19% tax threshold lifted from $37,000 to $45,000, and the 32.5% tax threshold increase from $90,000 to $120,000.

budget 2020

In addition, low and middle income earners will receive a one-off benefit of up to $1080 from the low and middle income tax offset (LMITO).

LMITO will also be extended for another year. So if you earn less than $66,667 you will get some or all of the low income tax offset back, while those on $37,000 or less get the full offset of $445.

Together, the measures are expected to see lower- and middle-income earners receive tax relief of up to $2745 for singles, and up to $5490 for dual income families compared with 2017-18.

The measures are sure to be welcomed by working Aussies.

"Bringing forward the Stage 2 personal income tax cuts is certainly a welcome measure. This will put cash in pockets as soon as the ATO puts out new tax scales. The Government has been generous in keeping the low and middle income tax offset for the current year, which will be payable next year on lodging tax returns," says Peter Godber from The Tax Institute.

Yet the extent to which they'll stimulate the economy is an open question.

Under normal conditions, low income earners typically have a higher propensity to spend, and thereby stimulate the economy, but COVID-19 has changed the rules of the game.

"What we've seen is a big fall in private consumption, so the hope is that the tax cuts will provide a kick along for consumption," says Mark Crosby, an economist at Monash Business School.

"[But] the issue is whether it stimulates the economy. People in this environment will be likely to save, not spend. In terms of creating jobs, it'll help but it's questionable whether it will do much to get the economy going."

And all spending isn't equal, when it comes to the economy.

"Spending money on electronics made in China doesn't benefit the economy as much as eating at local restaurants."

Australian Council of Social Service CEO Cassandra Goldie thinks the money would be would be better spent on the jobless rather than low and medium income earners.

"The country's leading economists have been telling the Government that an adequate JobSeeker rate is far more effective than income tax cuts in generating the economic stimulus we need to rebuild out of recession. While people on higher incomes can choose to save, people on low incomes are living week-to-week and have no choice but to spend in the real economy on the basics, boosting business recovery."

We're cutting through the confusion to help you manage your money during the coronavirus outbreak. Click here for more on how COVID-19 could affect your job, budget, super and investments.

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David Thornton is a journalist at Money magazine. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.
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