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If you build it, they will charge

The Australia Institute, October 2017

Governments around the world offer incentives to support electric vehicles. Australia does not. This paper examines how we can boost electric vehicle sales – in four proven, low-cost ways.

There is a race to transition the world’s massive car fleet to electric vehicles and Australia is falling behind. Technological improvements make electric vehicles more affordable – particularly the price of lithium-ion batteries, which fell 93% between 1995 and 2014. But there are structural impediments to Australians taking advantage of the increasing affordability of electric vehicles.

This paper will look at policies (including discussion of tax incentives) that Australian governments can implement to overcome these structural barriers. If governments act now to support the development of the market, financial and environmental benefits will flow.


Trump tax cut a threat to investment: Joyce

Annabel Hepworth, The Australian, 19 October 2017

Australia is falling behind as Donald Trump proposes to slash the US corporate tax rate, a threat to local investment, Qantas boss Alan Joyce has warned.

Mr Joyce, who is also on the board of the Business Council of Australia, pointed to warnings by the nation’s peak business group that the Trump administration’s plan would suck investment dollars away from places like Australia.

“Which is clearly what happens when you get huge differentials like this, because people will make decisions based on the returns that they are going to get and investment returns from US companies improves compared to Australia and Australian investments,” Mr Joyce told The Australian this week, during a flight taking Qantas’ first Dreamliner from Seattle to Sydney.

“And multinationals will make that decision. And that’s clear.

“I think everybody that is an economist, anybody that looks at it clearly knows they will make less capital investment in Australia if the differential continues.”

He said that different tax rates “make investors look at business cases differently”.

In the US, Mr Trump has announced plans to cut the federal rate from 35 per cent to 20 per cent.

The BCA has argued it is crucial to cut Australia’s company tax rate to attract foreign investment, although this was challenged this week by Reserve Bank assistant governor Luci Ellis, who said that if Australia could not attract foreign capital with its current environment the exchange rate would fall, making Australia more competitive.

Business has been pushing parliament to cut the company tax rate.

It has been citing Treasury estimates that cutting the company tax rate to 25 per cent would boost GDP by $17 billion a year.

Treasurer Scott Morrison has also pointed to the US plan to argue the case for tax reform.

Yesterday the House of Representatives was set to resume debate over extending company tax cuts to all companies. In March, the Senate agreed to gradually reduce the company tax rate for businesses to 25 per cent in 2026-27, but this was confined to businesses with a yearly turnover of up to $50 million.

BHP labelled Australia’s ‘worst tax dodger’ by former treasurer Wayne Swan

Adam Gartrell, The Sydney Morning Herald, 19 October 2017

Former treasurer Wayne Swan has launched another extraordinary attack on mining giant BHP, labelling it Australia’s “worst tax dodger” and linking a million dollar bonus to the company’s CEO to his success at minimising tax.

Under the cover of parliamentary privilege, Mr Swan called BHP “a fiscal termite eating away at the foundations of our corporate tax system” and rubbished the company’s claims to be a global leader in tax transparency and corporate responsibility.

The world’s biggest miner has been in a long-running dispute with the Australian Tax Office over assessments spanning 11 years that total $661 million in primary tax, plus interest and penalties that take it to more than $1 billion. Under dispute is the margin on mark-ups on commodities sold to its Singapore marketing business, which many argue is a ploy to avoid tax in Australia.

BHP strongly denies this accusation.

But Mr Swan said the BHP dispute accounted for a quarter of the ATO’s total $4 billion total corporate tax disputes, and accused the company of “pillaging the Australian Treasury and short-changing the Australian people, pure and simple”.

The backbench Labor MP – who clashed with the resources sector over his failed mining tax – also took aim at the company’s “self-righteous” leadership, claiming chief executive Andrew Mackenzie’s latest million dollar bonus was linked to tax evasion. Tax representation is listed as one of Mr Mackenzie’s performance indicators in the company’s 2017 annual report.

“In essence, BHP’s board have awarded their CEO a million dollar bonus for a billion dollars avoided in tax,” Mr Swan said.

“A million dollar bonus for organising aggressive tax minimisation through a tax haven resulting in one of the largest tax disputes in Australian history. A million dollar bonus for enhancing transparency and tax reputation when the company’s current tax affairs can only be described as a high farce.”

BHP declined to comment on Mr Swan’s speech but a company source dismissed his claims around executive remuneration as ridiculous.

In its latest economic contribution report the company described its dispute with the ATO as “complex”.

“BHP does not agree with the ATO’s position. Consequently, we have objected to all of the amended assessments and intend to continue to defend our position, including by initiating court action if necessary,” it said.

BHP said it has paid $66 billion in taxes and royalties to Australian governments in the past decade.

It paid a corporate effective tax rate of 34.5 per cent in 2017, higher than the general corporate rate of 30 per cent. Once royalties are included, the rate increases to 46 per cent.

Mr Swan made the claims during a debate on the government’s next tranche of company tax cuts, which he said was part of the “toxic foreign import” of trickle-down economics.

Australians are giving less to charity. Here’s why

Matt Wade, The Sydney Morning Herald, 18 October 2017

Each year the taxman delivers a revealing appraisal of Australia’s generosity. Deep within a report titled Taxation Statistics are details of the deductions individual taxpayers claim for charitable donations. It doesn’t cover every contribution made to good causes, of course. But its a rigorous insight into the nation’s altruism.

Here are fivetrends inAustralia’s giving to charity revealed by the ATO’s latest assessment.

1) Individuals don’t give away a very big share of income

Analysis of the latest tax data by Queensland University of Technology’s Centre for Philanthropy and Nonprofit Studies shows tax-deductible donations made by individuals climbed to a record high of $3.1 billion in 2014-15. But the share of income being donated is less impressive. On average, individual taxpayers who made tax-deductible donations gave just 0.4 per cent of their taxable income. That share was up a little on the previous year but still lower than before the 2008-09 global financial crisis.

And even that figure has probably been boosted by improved record keeping rather than generosity, said the QUT report author, Professor Myles McGregor-Lowndes. “I’ve got a strong suspicion that people are becoming better at retaining tax deductible receipts so they can claim them on tax,” he said.

A trend for employees to make donations through their workplace payroll and for big charities to email donors end of year statements has made is it much easier to claim deductions. Even so, only about a third of the taxpaying population claimed a tax-deductible donation according to a study in 2014-15.

2) Charities depend heavily on the super rich

An elite group of just 6600 taxpayers with taxable incomes above the $1 million mark made more than a fifth of all tax-deductible donations in 2014-15. “Wealthier people have more discretion to give,” says McGregor-Lowndes.

But giving by those on high incomes – $180,000 a year or more – is much more sensitive to stock market gyrations and economic shocks than for others. Tax-deductible claims by the wealthy slumped during in the wake of the global financial crisis and took some years to recover. The Melbourne suburb of Toorak-Hawksburn made tax-deductible gifts worth more than $100 million in 2014-15, the highest in the country. Although taxpayers in NSW made the largest average donations of $836.

3) Even so, the rich don’t necessarily donate the biggest share of their incomes

When it comes to the proportion of income that people give away, middle- and low-income neighbourhoods often outshine wealthy ones. The National Australia Bank’s charitable giving index, which tracks donations made electronically, shows those donating the biggest share of their income tend to come from suburbs with modest incomes. The South Australian suburb of Sturt, with an average income of just over $47,000, gave the highest proportion of income on average in year to February, NAB’s data shows.

One mystery in the latest tax figures is that about 40 per cent of those with a taxable income over $1 million claimed no tax deduction donations whatsoever in 2014-15. “Its gob smacking to me that you’d have an income of a million dollars and you don’t claim anything,” said McGregor-Lowndes. “These are sorts of people who tend to keep their receipts or have someone to keep them for them.”

4) Some occupations stand out

Ministers of religion claimed an average of 2.2 per cent of their taxable income as gifts – the highest rank proportion of any occupation. Mcgregor-Lowndes puts this down to the need for them to set an example to others. “It is very difficult to tell your congregation to tithe or to make a periodic donation if you are not doing so yourself,” he said.

The occupation with the biggest share claiming charitable tax deductions were police and other emergency service workers (73 per cent). The tax data shows that women gave away slightly bigger proportion of their taxable income than men, although men gave more overall. It also shows those aged over 65 years donate much more than all other age groups.

Even though the share of Australians who claim no religious affiliation is on the rise, giving to religious organisations remains popular. The 2016 Giving Australia Project, which surveyed Australians about all charitable giving (not just tax deductible donations), found more was donated to religious organisations than any other cause.

5) There are signs we are finding it harder to be generous

The increase in tax deductible donations revealed in the 2014-15 tax figures was driven by the contributions of high-income earners. The difference between the average donation and the median donation tells the story. The average individual tax deduction jumped 17 per cent to $674 but the median, or middle, donation rose just 5 per cent to $105.

This suggests sluggish wages growth and subdued consumer confidence are taking a toll on charitable giving. NAB’s charitable giving index showed giving in Australia fell by 1 per cent in the year to February. That compares with an increase of 6 per cent in the previous year and growth of about 10 per cent back in 2013.

Australia also slipped several rankings in the 2017 World Giving Index, published last month by the UK-based Charities Aid Foundation. Australia still ranks among the top 10 countries on the index, which compares nations according to the share of population that help strangers, donate money, and volunteer time. But the research revealed a sharp drop in the proportion of Australians donating money to charity.

Web of Australian Adani solar companies leads to offshore tax havens

Joshua Robertson, The Guardian, 18 October 2017

Adani has spread its use of offshore tax havens to its Australian solar projects, providing another avenue that could allow the wealthy Indian family behind the transnational to legally minimise tax paid on income from local operations.

Six companies linked to Adani’s renewables business, which chairman Gautam Adani wants to make the biggest in Australia by 2022, were registered with the Australian Securities and Investments Commission on 3 August.

The companies all have Australian-based Adani executives as directors. But they fall into two groups – three companies in each – which follow a markedly different path to their ultimate owners.

One trail leads back to Adani Enterprises, the stockmarket-listed company in India which is vying to build Australia’s largest coalmine, and in which the Adani family are the major shareholders.

The other bypasses the public company in India entirely, leading back to the Adani family via privately owned companies based in the Cayman and British Virgin islands, recognised tax havens.

The companies were registered a month before the energy giant said it would proceed with “one of the world’s most advanced solar energy plants” at Rugby Run near Moranbah, the largest of three plants Adani proposes in central Queensland and South Australia.

Gautam Adani trumpeted the group’s Australian solar ambitions when announcing a power purchasing agreement for Rugby Run with an unnamed but “significant power retailer”.

“We are the largest generator of solar energy in India and we aim to replicate that in Australia,” he said.

Adani bought Rugby Run – a former cattle property once earmarked as a rail thoroughfare for transporting coal from its contentious Carmichael mine – for $1 on 9 June last year from Queensland beef barons the Acton family, transfer documents show.

The site gives its name to one of three companies that signal the start of the tax haven trail from the Australian solar business: Adani Rugby Run Operations Pty Ltd, Adani Renewable Operations Pty Ltd and Adani Renewable Operations Holdings Pty Ltd.

All three companies have a parent company in Singapore, Global Renewable Energy Holding Pte Ltd, which was incorporated in January with Vinod Shantilal Adani as sole director.

Singapore company filings show Global Renewable Energy Holding Pte Ltd is owned by Atulya Resources Ltd in the Cayman Islands. Atulya Resources is in turn owned by ARFT Holding Ltd in the British Virgin Islands. Documents held by the Singapore corporate regulator disclose that “the Adani Family” is an ultimate shareholder of ARFT Holding Ltd.

Back in Australia, the other three companies registered in August were Adani Renewable Assets, Adani Renewable Asset Holdings and Adani Rugby Run.

They are held by Adani Global Pte Ltd in Singapore, which is held by Adani Global Ltd in Mauritius, in turn owned by the public company Adani Enterprises Ltd in India.

Adam Walters, the principal researcher for Energy Resource Insights, who uncovered the new tax haven links, said Adani’s use of tax havens and parallel company structures was entirely legal.

But he said they could enable the Adani family to generate income from operating the solar farms, via agreements with the public Indian parent company that owned the assets. These profits could then be channelled to the Adani family via the Cayman and British Virgin islands, which would have favourable tax implications for them, Walters said.

“Rather than benefit because of their shareholdings in listed companies in India where they have to pay lots of tax, they could benefit via the British Virgin Islands,” he said.

“What could well be the case is the listed companies have got the money behind them, they can build the things, but then the profits can be generated in the family-owned businesses.”

Walters said this was a pattern suggested elsewhere in Adani’s corporate structures around Australian mine and rail projects.

It arose when Adani Mining had an opportunity to dispose of a future liability worth billions, in the form of a $2 a tonne royalty deed held by the original owner of the Carmichael mine site, Linc Energy.

When a distressed Linc agreed to offload the deed for $150m in 2014, it was not Adani Mining that bought it. Instead, Adani Mining lent $150m to an Adani family-held trust, linked to the rail project, to snap it up.

“This means that the family could potentially receive over a billion dollars in the Caribbean even if the mine is unprofitable in Australia,” Walters said.

“Adani Mining, rather than spending $150m, now have an IOU on their balance sheet for $150m. In the short term, the company looks healthier than it actually is and in the longer term, if the mine does go ahead then the Adani family make the money.”

The trust that could enrich the family through coal royalties is held via the same tax haven companies as the solar companies.

The $150m was one of several multimillion-dollar loans in Australia by public Adani company subsidiaries to private Adani family-owned companies.

“If [the solar business] is the same as elsewhere, we know the Adani family has not actually put a single dollar into Australia – they’re inter-company loans to the family from the listed company,” Walters said.

He said there were another three trusts registered by Adani in Australia around the solar projects but “beneficial ownership of these remains unclear at this stage”.

The chief executive of Adani Mining, Jeyakumar Janakaraj, has dismissed any suggestion the Australian operations would be “hiding profits” via holding companies in tax havens.

“There is absolutely no implication of this, as everything that is being done in Australia or in India is transparent,” he told India’s Economic Times.

“We make regular filings to the tax offices and government authorities. This report is a desperate attempt by the activists who were not able to legally stall the [Carmichael] project or get the government to do it.

“This is their last attempt to hurt the goodwill we enjoy, but we are going ahead with the project as planned.”

The 175-megawatt plant would rate among Australia’s biggest solar projects, along with Adani’s proposed 100MW farm at Crinium Creek, also in central Queensland, and a 140MW far near Whyalla in South Australia. Adani is the largest solar generator in India.

Adani declined to comment on the company arrangements.


Reserve Bank, Business Council clash on tax rates

Glenda Korporaal, The Australian, 18 October 2017

Reserve Bank assistant governor Luci Ellis has challenged the Business Council of Australia’s argument about the importance of cutting the corporate tax rate in attracting foreign investment.

Ms Ellis said the corporate tax rate in Australia was “irrelevant” for domestic investors because of our system of dividend imputation.

She said if Australia could not attract foreign capital with its current tax and regulatory environment, the exchange rate would fall, and make Australia more competitive.

Business Council of Australia chief executive Jennifer Westacott told the Citi Australia and New Zealand Investment Conference today that funds would flow from Australia to the US if President Donald Trump succeeded in his plan to cut the US corporate tax rate.

She said it was important for Australia to continue to cut its corporate tax rate to make it competitive with the rest of the world and continue to attract foreign investment.

“Business investment in Australia is now at the lowest it has been as a share of the economy since 1994, off the back of the last recession,” she said.

Ms Ellis said the tax rate was one of many variables considered by foreign companies in investing in Australia.

She said Australia had seen a strong wave of investment in mining because of the mining boom of the last decade.

She said foreign companies invested in Australia because we had LNG, iron ore, coal and now lithium.

“We have had a strong phase of about 10 years of incredibly strong mining investment,” she said.

“Guess what? Multinational resource companies are not going to make that investment in a country which doesn’t have those resources just because they have a lower tax rate.

“They will invest where the LNG and the iron ore and the coal and the lithium actually are.

“The real reason we attract foreign capital rather than rely on foreign capital is precisely because we have these resources. They are available and they aren’t going anywhere.”

She said non-mining investment in Australia was already starting to pick up, as was demonstrated in the June national accounts figure.

Ms Ellis said Australia’s dividend imputation system meant that the corporate tax rate was only an issue for foreign investors.

“One of the differences between Australia and many other economies is that we have dividend imputation.

“From the perspective of the domestic investor, the corporate tax rate was irrelevant.

“It doesn’t matter because you get it back through dividend imputation.

“It only matters if you are a foreign investor making the choice to invest in Australia versus another economy.”

Ms Ellis said when foreign companies made decisions on where to invest they considered many variables including the tax rate, the business environment, the rule of law, the educational base of the country “and where the resources are”.

“The reason we have a low share of business investment relative to the recent past is because we had a mining investment boom and that mining investment boom is almost over.

“I am not sure I buy the idea that we have a great drought of non-mining business investment happening.”

But Ms Westacott said that the corporate tax rate was an important factor for global companies considering where to make their next investment.

“We are kidding ourselves to think that we are the only place in the world with LNG, with iron ore, with coal, and we are the only stable place to do business.

“It is simply not true. If you are in a globally competitive environment, and you are a global board making a major investment, the tax rate matters.”

She said Australia’s corporate tax rate of 30 per cent had been set years ago to keep the country in like with the OECD average.

But she said OECD countries were now cutting their tax rates and the world was watching President Trump’s plans to cut the tax rate in the US, which was already generating a lot of business optimism in the US.

Cochlear warns on research tax changes

Sarah-Jane Tasker, The Australian, 17 October 2017

Cochlear’s chairman Rick Holliday-Smith has warned that the global biotech could be forced to move investment offshore under proposed changes to research tax incentives.

Mr Holliday-Smith told his shareholders at today’s annual general meeting that Australia was looking to reduce research and development tax incentives at a time when many other countries appeared to be increasing incentives to attract R & D investment.

He said the changes the government was considering were complex but appeared designed to cap the levels of eligible R & D and introduce a range of qualification variables.

“We note that there are further proposed changes to incentives, which could further materially reduce the R & D tax benefits to Cochlear in Australia,” he said.

Mr Holliday-Smith said the impact of the decision to alter the R & D tax incentives could only be understood over the longer term.

“There may be little or no apparent impact from changes to taxation policy in the first year but over time I fear we will see the loss of an increasing amount of our incremental research investments to overseas jurisdictions,” he said.

Cochlear (COH) spends more than $150 million a year on R & D related activities, which represents 12 per cent of its revenue, with the majority of that activity done in Australia.

The Australian-listed company’s chairman said that while over 95 per cent of its revenue was generated outside Australia, the company paid more than 75 per cent of its taxes in Australia.

He added that the R & D tax incentive was important for globally mobile, export-focused, advanced manufacturing companies like Cochlear.

“These R & D related tax incentives have supported the commercial decisions that allow Cochlear to stay in Australia to the fullest extent possible and conduct the majority of its research in Australia,” he said.

Mr Holliday-Smith said the company’s commitment to R & D in Australia provided a training ground for leaders of the next generation of innovators, especially in the field of medical technology.

“We believe Australia needs global leaders in non-mining export-oriented businesses and we suggest Australia should encourage research-oriented companies like Cochlear, especially ones that are involved in advanced manufacturing and who are globally mobile,” he said.

Affordable power and tax cuts beat ‘picking winners’

The Australian, 16 October 2017

Bill Shorten’s claim in Adelaide on Saturday that the slogan he wants to hear in future is “Made in Australia’’ would be credible if the opposition turned its attention to the main problems impeding business and job creation. Labor should agree to pass the full gamut of the Turnbull government’s proposed company tax cuts — offset by reductions in recurrent government spending. On Wednesday, the House of Representatives is due to vote for the remainder of the government’s package, to cut the corporate rate from 30 to 25 per cent for all companies over the decade. In dismissing the plan as a “handout’’, the Opposition Leader is putting Australian manufacturers at a significant disadvantage to rivals offshore. Any leader serious about assisting manufacturing would also free up the workplace relations system to encourage wage rises based on productivity growth.

Mr Shorten is promising that his proposed $1 billion Australian Manufacturing Future Fund would “make sure that you get access to the low-cost finance which gets you ahead of the pack … Labor won’t let the big banks hold Australia’s advanced manufacturing back.’’ The fund would be modelled on the Clean Energy Finance Corporation, established by Julia Gillard under her agreement with the Greens to legislate an emissions trading scheme in 2011. As we said of the CEFC, taxpayers have often paid a high price for governments picking losers, which has too often been the case when they set out to pick winners. There is no reason why technically innovative proposals for automotive parts and food manufacturing, with good commercial potential, should not find investment backing. So should viable proposals for clean energy generation and storage.

Both sides of politics, unfortunately, have built up unrealistic expectations that governments have the means to subsidise renewables at no cost to consumers. Today’s Newspoll reveals that a thumping majority of Australians — 63 per cent to 23 per cent — believe governments should continue taxpayer-funded subsidies for investment in renewable energy. At the same time, 58 per cent are unwilling to pay anything more in electricity costs to help implement a clean energy target to foster more renewable energy sources.

Sharper battlelines over energy policy will be drawn when cabinet considers the government’s energy policy today, before a debate in the Coalition partyroom. While the government believes it is on track to reduce Australia’s carbon emissions under the Paris agreement by 26 to 28 per cent by 2030, the new policy is expected to emphasise reliability of supply over green energy subsidies. The ensuing fight with Labor and the Greens will be a defining issue until the next election. In addition to assisting households, affordable, reliable energy is essential to the future of Australian businesses. Without it, Mr Shorten’s “Made in Australia’’ mantra would amount to no more than hot air.

Property downturn a ‘threat’, says RBA

David Uren, The Australian, 14 October 2017

The property boom has lured hundreds of thousands of low-income Australians into negatively geared investments that the Reserve Bank fears could threaten financial stability in the event of a downturn.

In a warning that rising household debts are the biggest domestic risk to the Australian economy, the Reserve Bank is conducting “stress tests” of the banking system to see how it would cope with a severe recession, in which house prices plunged by 40 per cent or more.

In its latest review of the ­financial system, the Reserve Bank said the most vulnerable group of borrowers were those on low incomes. Its analysis of tax records shows 11 per cent of people earning less than $50,000 have an investment property, and most of them are negatively geared.

“Household indebtedness is high and, against a backdrop of low interest rates and weak income growth, debt levels relative to income have continued to edge higher,” the RBA said. Household debt recently touched a debt-to-income ratio of 194 per cent — one of the highest in the world.

The bank says while some households had taken advantage of low interest rates to accelerate their mortgage repayments, others had taken on more debt.

“Higher interest rates, or falls in income, could see some highly indebted households struggle to service their debt and so curtail their spending,” the bank says.

Although the initial assessment from the RBA stress test is that the high level of retained bank profits would provide a buffer in the event of a downturn, much would depend on how steep the fall in revenue was.

The RBA identifies three groups that are particularly exposed: investors aged over 60 who are still carrying mortgage debts; people negatively gearing multiple properties; and those buying properties in interstate markets they don’t understand.

The bank estimates about two million people have investment properties, of whom 80 per cent have a mortgage and 60 per cent are negatively geared.

“With many not earning positive income from their property, prospective capital gains are more likely the primary rationale for investing,” it says.

The RBA has long called for reform of property ­taxation, arguing that negative gearing and capital-gains concessions could encourage excessive speculative investment. The tax records show that 45 per cent of property investors earn less than $37,000 while more than 75 per cent earn less than $87,000.

Although people on high incomes incur the biggest losses on their negatively geared investments, the Reserve Bank says that relative to incomes, the losses are greatest for those at the bottom end of the income scales.

“Lower-income taxpayers may be more vulnerable to ­increases in debt-repayment ­obligations or reductions in ­income,” it says.

“They might also be more ­reliant on rental income to meet their repayments.”

Among community and personal service workers, for example, about 10 per cent have an investment property, of whom two-thirds are negatively geared. Their average income is only $31,790. Similar shares of low-earning labourers and sales workers have negatively geared investment properties.

The RBA says about 35 per cent of people in the lowest income bracket are aged over 60, of whom many are retired. Over the past decade, the share of property investors aged over 60 has doubled to about 22 per cent. Of those with no income, suggesting they have retired, about 40 per cent still have a mortgage.

The RBA’s analysis shows there has been rapid growth of people holding multiple properties. The numbers holding five or more investment properties jumped by 7.5 per cent in 2014-15, the latest year for which tax records are available. The tax data does not reveal further information about the incomes and characteristics of the multiple property investors, but the RBA says that they “likely contributed to higher risk”, given the strong growth in investor credit during the boom and the riskier types of borrowing, such as interest only loans, that have been popular.

Higher taxes to hit 1.6 million Australians, Parliamentary Budget Office report reveals

Eryk Bagshaw, The Sydney Morning Herald, 12 October 2017

More than one million Australians will be hit with increased taxes over the next five years as the rising wages of middle income earners force them into higher tax brackets.

The assessment from the Parliamentary Budget Office, released on Wednesday, could set the stage for pre-election personal tax cuts as early as next year.

The Budget Office found the average tax rate will climb 2.3 percentage points over the next five years and affect at least 1.6 million Australians.

“The largest increase is expected to be faced by individuals in the middle income quintile, whose taxable income is expected to average $46,000 in 2017-2018,” the Budget Office said.

“Their average tax rate is expected to increase from 14.9 per cent to 18.2 per cent.”

The 20-year-high is equivalent to an extra $2000 tax per year for someone on that income.

As a result, people are pushed into higher tax brackets without necessarily earning more money in real terms.

Treasurer Scott Morrison undertook the first significant change to tax brackets since 2007 when he increased the middle tax bracket threshold from $80,000 to $87,000 from July 2016.

The changes saved about 500,000 Australians from shifting into the next tax bracket at the time, but the Budget Office is now predicting that by 2021 up to 900,000 people will move into that tax threshold, where they pay 37¢ in tax on the dollar.

The government has in the past relied on this extra revenue to get it on the path back to surplus and as a result meaningful tax relief for other income groups has not occurred for the past decade.

“The government will consider further measures to reduce the burden of tax as fiscal settings allow,” Mr Morrison said last year, describing bracket creep as the “silent tax” that discouraged people from working more and hinting further adjustments could be on the cards.

The Budget Office said in addition to bracket creep, average tax rates are projected to increase due to policy changes – most notably the decision to increase the Medicare Levy from 2019-20 – that will particularly hit people in the third, fourth and fifth highest tax brackets.

It added that demographic changes would also reduce the overall net tax rate by 2021, as net migration increases the proportion of younger workers and an ageing population increases the number of seniors.

Shadow treasurer Chris Bowen said middle income earners would wear the greatest tax burden under the Coalition.

“At a time when wages are growing at record lows and households are facing a cost of living crunch due to record levels of debt and rising energy costs, now is not the time to be hitting middle Australia with increases in personal income tax rates,” he said.