As the 2025 Federal Election approaches, both the Labor Government and the Coalition have unveiled tax policies aimed at addressing cost-of-living pressures. I analyse their proposals below.
Labor’s proposed tax changes for 2025
As well as the existing stage three income tax cuts, which came into force on 1 July 2024, Labor’s policy manifesto contains a number of proposals which aim to build on that tax cut by providing relief to low and middle-income earners.
Key elements of Labor’s tax plan:
Standard $1,000 tax deduction: From 1 July 2026, the government will introduce an automatic deduction of $1,000 for work-related expenses without the need for receipts, benefiting approximately six million workers who currently claim less than this amount.
The reform will allow taxpayers to choose to claim a $1,000 instant tax deduction instead of claiming individual work-related expenses. It is intended to save time and money for taxpayers, who won’t – in theory – need to keep receipts/invoices to substantiate the $1,000 deduction. Of course, in practice, many taxpayers will still need to keep full substantiation as they won’t necessarily know whether their work-related expenses are more or less than $1,000 until they get to the end of the tax year.
If you wish to claim more than $1,000 in work-related expenses, you won’t be able to claim the automatic deduction. You will need to follow the current rules, which involve full substantiation of most expenses.
The ATO will not need to audit taxpayers who claim the standard deduction. This will enable them to focus on higher tax claims (including work-related deductions over $1,000), which is sure to increase the pressure on taxpayers to make sure they have the necessary records to support their claim.
Currently taxpayers can claim up to $300 in work-related expenses without substantiation. If they exceed the $300, they need full substantiation for all their expenses, not just the excess over $300. The $300 limit doesn’t apply to claims for car expenses, meal allowance, award transport payments allowance, or travel allowance expenses. Taxpayers do need to prove how they spent the money and how they calculated the claims.
It remains to be seen how Labor implements this proposal; will it be a blanket exception for all work-related expenses of less than $1,000 or will it simply piggy-back on the existing $300 exception (raising the threshold by $700), complete with its exclusions and checks?
And note – this is a standard deduction, not a simple refund of $1,000. The amount you get back depends on your tax rate. For example, someone who pays tax at 30% will get $300 (30% x $1,000) back.
Taxpayers will need to complete a tax return to claim the deduction which means that it will be July 2027 at the earliest before they see any benefit.
Reduction in the bottom rate of income tax: From July 1, 2026, the tax rate for the lowest tax bracket will be cut from 16 per cent to 15 per cent, which is equivalent to one cent less for every dollar you earn between $18,201 and $45,000. Then, on July 1, 2027, the rate will fall again to 14 per cent. The actual impact on taxpayer’s take-home pay will be limited; it amounts to approximately a cup of coffee for each and every taxpayer!
The Coalitions proposed tax changes for 2025
The Coalition has a different plan. They are proposing new tax relief for certain groups.
Key elements of the Coalition’s tax plan:
One-off $1,200 tax offset: Aimed at individuals earning up to $144,000, it offers a refunds of up to $1,200 to be applied in the next financial year. It is strictly time-limited, therefore in 2026-27 the offset ends (with the resulting pain of not receiving the offset looking very like a tax increase to many taxpayers!).
This “cost of living tax offset” is very similar to the now abolished Low and Middle Income Tax Offset (LMITO). Those earning between $48,000 and $104,000 would benefit from the full offset of $1,200. Taxpayers who earn below $48,000 would receive a smaller offset, as would those who earn above $104,000 and up to $144,000.
The offset would be paid as a lump sum at tax time next year, meaning that taxpayers need to lodge a tax return to get it.
Mortgage interest tax deduction: First-home buyers can deduct interest on the first $650,000 of their mortgage from taxable income. The coalition says that a first home buyer with a taxable income of $120,000 with a $650,000 mortgage at 6.1 per cent will receive a benefit of around $12,000 a year.
Eligibility would be limited to new builds and places of principal residence, and interest could only be deducted on the first $650,000 of the loan. Single people earning up to $175,000 and joint applicants with a combined income of $250,000 would be covered.
The exact benefit would be based on the person or couple’s incomes and tax liability but the Coalition suggested an individual in the 37% tax bracket could receive a maximum deduction of $14,500 a year.
The scheme has been criticised by housing experts; they say that the effect of a government subsidy for housing costs like this will be to push house prices up even further.
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