In a time when real wages are falling, the Australian government has finally acknowledged that wage earners have been disadvantaged by the tax system. The latest budget introduces measures aimed at restoring fairness, particularly for those whose income comes primarily from wages rather than investments.
Wage Growth Remains Weak
Data from the March quarter shows private sector wages grew by just 0.76%, the slowest since the end of 2024. If sustained, annual growth would barely exceed 3%, the top of the inflation target. In annual terms, private sector wage growth dropped to 3.2% in the year to March, the slowest since mid-2022. This is well below the inflation rate of 4.6%, meaning real wages have fallen.
Reserve Bank Governor Michele Bullock recently expressed concerns about a potential wage-price spiral, but the latest figures show no evidence of such a trend. The lack of wage growth underscores the need to boost incomes for wage earners.
Budget Measures Target Inequality
The budget's only new tax cut is the Working Australia Tax Offset (WATO), a $250 benefit exclusively for wage and salary earners, not investment income. This aligns with changes to capital gains tax (CGT) and negative gearing, which have long benefited property investors and high-income earners.
Treasury research reveals stark disparities in tax benefits. An Australian on median lifetime earnings receives about $12,356 from the CGT discount, negative gearing, and discretionary trusts. In contrast, the richest 1% gains $732,253—nearly 60 times more. The richest 10% receive 56% of all capital gains benefits, more than the other 90% combined.
Impact on Tax Rates
The tax system has historically favored non-wage income. A worker earning $150,000 in wages pays an average tax rate of 29%, while someone with the same income from investments pays just 27.5%, thanks to discounts and tax minimization. This amounts to $2,250 less in tax for the latter.
To address this, the budget reduces the CGT discount and introduces a 30% minimum tax rate on discretionary trusts. These changes aim to ensure that income from investments and trusts is taxed more similarly to wage income.
Housing and Investment Distortions
The CGT discount, introduced in 1999, has disproportionately encouraged investment in rental properties over shares. This has driven up house prices, and for the first time since World War II, fewer than half of Australians in their early 30s own a home. The new measures seek to rebalance incentives and improve housing affordability.
While the Reserve Bank remains cautious about wage growth, the budget represents a step toward a fairer tax system. By targeting the advantages enjoyed by non-wage earners, the government aims to support those who rely on wages in an era of falling real incomes.
