Australia’s GDP grew by 0.2% in the last June quarter amidst its smooth recovery from the economic difficulties faced over the years.
This is good news for both businesses and individuals since it does have an impact on your tax obligations and potential refunds.
If you are wondering in what way to figure out where economic growth may affect a tax return, you’re likely not alone.
In this blog post, we’ll detail some main ways in which a growing economy can impact taxes, what you need to watch out for, and how to prepare for the upcoming tax season.
Understanding The Economic-Tax Connection
The relationship between economic growth and taxation works through various channels to directly impact your tax return. In general, growing economies see increased employment, higher wages, and more business activity.
These factors create an avalanche effect throughout the tax system, impacting everything from individual income tax brackets to individual deductions and credits.
Some key areas have been singled out here. A growing economy has brought about noticeable improvements to your tax equation this year.
1. Impact On Income And Tax Brackets
The most common way in which a growing economy affects your tax return is through income. When the economy grows, it generally creates more opportunities for employment and, ultimately, earns you a higher income.
More businesses are expanding, unemployment rates may fall, and companies might offer better salaries to attract and retain talent. This is great news for your income, but it’s crucial to understand how this income growth interacts with Australia’s tax brackets.
Australia uses a progressive tax system. This means that as your income rises, you move into higher tax brackets and pay a larger percentage of your income as tax.
If in a growing economy, your income rises significantly, you will have crossed into a higher tax bracket. This certainly doesn’t mean that you are worse off–you are still earning more–but it does mean that more of your increased income will go to tax.
2. Changes To Tax Offsets And Deductions
Governments sometimes adjust tax offsets and deductions in response to economic conditions. Tax offsets directly reduce the amount of tax you pay, while tax deductions reduce your taxable income, which in turn lowers your tax.
In a growing economy, the government might review existing tax offsets and deductions. They might decide to reduce or phase out certain offsets if the economy is strong and people are generally in a better financial position.
Conversely, to further boost growth, new targeted tax incentives or deductions might be introduced to encourage specific economic activities like investment in certain sectors or industries.
For example, in a booming economy, the government might decide to scale back certain low and middle-income tax offsets if they believe the need for broad-based support has lessened.
On the other hand, they might introduce new deductions to encourage businesses to invest in research and development to sustain economic momentum.
3. Impact On Capital Gains Tax
Economic growth often fuels investment and asset appreciation. This can lead to more people realizing capital gains, which are profits made from selling assets like shares or property. Capital gains are subject to Capital Gains Tax (CGT) in Australia.
In a growing economy, if you sell assets that have increased in value, you might be liable for CGT. The amount of CGT you pay depends on factors like how long you hold the asset and your individual tax rate.
While CGT is typically not taxed at your full income tax rate (discounts may apply, especially for long-term holdings), it can still be a significant component of your tax liability, particularly in a thriving economy where asset values tend to rise.
If you’ve sold assets during a period of economic growth, it’s essential to factor in potential CGT implications when preparing your tax return. Proper record-keeping of asset purchases and sales is crucial for accurately calculating any capital gains and related tax obligations.
4. Government Revenue And Potential Tax Policy Shifts
A flourishing economy usually translates into higher government revenue via taxes. More people at work and higher output would lead to increases in income tax and company tax collections.
This rising revenue affords the government more leeway in its budget and potential tax policy decisions.
When the economy is in an upswing accompanied by increased revenues, governments might pursue various changes in tax policy.
These might include:
- Reduction in taxes: In an event where the government lowers income tax rates, this would return some of the economic gains to taxpayers while at the same time further stimulating spending.
- Increased spending on services: Increased revenue allows for increased government spending for improvement services such as healthcare, education, and infrastructure. Though not directly impacting your tax return, these are the investments to improve the overall economy that may very well affect future tax policies.
- Changes to tax laws: Economic growth might generate triggers for reviewing existing tax laws often to make sure they still reflect the environment in which the economy is changing. Such changes could affect many sides of taxation: from business tax rules to individual income tax rules.
Although the precise tax policy responses to economic growth are contingent and depend on governmental decisions, it is crucial first to appreciate that the growing economy itself may be a spur to tax policy changes that may well come to bear upon your tax return in years ahead.
Ready To Simplify Your Taxes? KPG Taxation Can Help.
The growing economy and its various effects on taxes can sometimes be a little problematic. If this sounds like you, don’t worry! KPG Taxation will take the hassle away from filing your tax return.
Want to take the guesswork out of your tax this year? Call KPG Taxation for easy, professional help today, and let us do the heavy lifting.
