Overview of the Tax Cuts
Under the Treasury Laws Amendment (More Cost of Living Relief) Act 2025, the 2025–26 Federal Budget introduced new tax cuts which are now law, taking effect 1 July 2026. The 16% marginal rate on taxable income between AU$18,200 and $45,000 will fall to 15% in 2026-27, and then to 14% in 2027-28 and later years. (ato.gov.au)
Additionally, Medicare levy low-income thresholds and thresholds for Senior Australians and Pensioners Tax Offset (SAPTO) are being increased in line with CPI from income year 2024-25 onward to ensure that low-income Australians don't lose relief due to bracket creep. (ato.gov.au)
Who Benefits Most?
- Employees earning in the range between $18,201 and $45,000 will enjoy immediate reduction in marginal tax for that bracket from 16% to 15% in 2026-27.
- Sole traders and small business owners who draw that income will similarly benefit.
- Low income earners, seniors, and pensioners benefit from increased threshold levels, possibly with reduced or no Medicare levy liability.
Tax Planning Implications
- For the 2025-26 financial year, assess whether some income can be managed into 2026-27 where lower rates apply. However, timing and cash-flow matter.
- For those close to the top of the 16% bracket, additional income or prepayments might push you into higher rates; anticipate liability.
- Review pre-tax deductions, salary packaging and concessional super contributions to reduce taxable income within taxed brackets.
Example Scenario
Michael, an employee earning $40,000 a year, currently pays 16% on income above $18,200 (≈$21,800). Starting 1 July 2026, that same portion will be taxed at 15%. If his income remains unchanged, he'll save around AU$218 per annum in tax for that bracket (assuming ~$21,800 taxed at 16% vs 15%). Further savings will come in 2027-28 when rate drops to 14%.
Key Steps to Take
- Project your income for 2026-27 — consider side gigs, bonuses, business income.
- Adjust PAYG withholding if needed — employees may need to review withholding rates to reflect lower bracket rates.
- For sole traders, ensure estimated tax payments are recalculated with new rates.
- Investigate pre-year-end income shifts, such as delaying invoice issuance or bringing deductible expenses forward where possible.
- Keep updated with the ATO and Treasury to monitor final rules around implementation.
These cost-of-living tax cuts are amongst the most direct recent reforms to impact everyday Australians. With early awareness, you can maximise savings and ensure a smoother tax year ahead.