Australia is grappling with a surge in income tax rates, an issue not due to new government policies, but an insidious consequence of bracket creep. For years, income tax thresholds have not been regularly indexed to inflation, leaving many Australians paying a higher share of their income to the taxman.
This silent tax increase has become a significant financial burden, particularly for middle-income earners. A growing call for reforms is now gaining momentum, with some experts suggesting changes to superannuation taxes as a potential solution.
The Impact of Bracket Creep on Australian Households
According to the University of Melbourne’s Professor Roger Wilkins, Australia is witnessing its highest average income tax rate in over two decades, with the average tax rate for Australians aged 15 and above reaching 11.7% in 2022-23, up from 10.1% in the previous year.
The phenomenon, known as bracket creep, occurs when rising wages push taxpayers into higher tax brackets without a corresponding adjustment in the income tax thresholds to account for inflation.
This has particularly affected middle-aged Australians, with those aged 35 to 54 seeing sharp increases in their tax burden, often coinciding with other financial pressures such as mortgages and student loan repayments.
Analysis of figures from the Parliamentary Budget Office (PBO) and the Australian Tax Office (ATO) found that workers paid an additional $3,500 in tax in the last financial year due to bracket creep. Dual-income households were hit hardest, paying an extra $7,000, even with the government’s revised Stage 3 tax cuts.
Proposed Superannuation Reforms to Address Tax Burden
In an attempt to address this growing fiscal strain, experts are now turning their attention to Australia’s superannuation system. The current system allows tax-free withdrawals from superannuation up to certain limits for retirees. However, Wilkins argues that this exemption is outdated and disproportionately favours wealthier retirees.
According to him, introducing a low tax rate on superannuation withdrawals for all retirees, regardless of income, could help balance the tax burden more equitably between working-age Australians and retirees. Wilkins suggests that the superannuation system, alongside possible hikes in the Goods and Services Tax (GST) and other broad-based taxes like inheritance and capital gains tax, could be key to plugging the revenue gap caused by bracket creep.
The Long-Term Solution: Addressing Structural Flaws in the Tax System
While some steps have been taken to adjust the income tax system in recent years, these have not sufficiently addressed the root cause of bracket creep. Previous adjustments, such as lifting the upper limits of middle-income tax brackets in 2020-21, provided short-term relief. However, as wages continue to rise with inflation, the fixed nature of tax thresholds ensures that the issue will persist.
As Wilkins notes, between 2011 and 2023, the average household income before tax increased by 48%, but the real income growth—once adjusted for inflation—was only 10%. Until comprehensive tax reform, including inflation-indexed brackets, is enacted, Australians will continue to face this stealthy tax increase, while the debate over superannuation reforms grows louder.
