In 2016 a couple of psychologists in Illinois conducted an experiment to determine the habits of creepy people. They found that men are generally creepier than women and concluded that creeps exhibit behaviours such as staring, asking personal questions and oversharing, as well as having some hygiene issues. The creepiest professions are clowns, taxidermists, sex-shop owners and funeral directors. Phew, no accountants. 

But as accountants we’ve been dealing with a creep in our tax system for many years. Bracket creep occurs when a government does not regularly adjust tax thresholds to allow for inflation, as has always been the case in Australia.

Other less creepy countries like the United States, Canada, Switzerland and Belgium adjust their federal tax thresholds regularly through indexation linked to either inflation or wages growth.

Locally, we very occasionally adjust our tax brackets in response to inflationary measures, like we did in the early 2000s, but never regularly. 

Here’s an example of bracket creep. Shirley earns $135,000 in the 2025 financial year and is taxed $31,288 which averages at 23.17%. Over the next five years she gets inflationary pay rises of 3% per annum, so by 2030 she is earning $156,502. Shirley is no better off, because the cost of living has also gone up by 3% each year.

Our tax rate increases from 30% to 37% above an income of $135,000, so from year two, Shirley will be pushed into a new tax bracket because of her pay rises.

It seems logical then that the government would increase the tax bracket each year by inflation, so that the 30% bracket is also at $156,502 in 2030, and Shirley is no worse off. But it doesn’t.

If that bracket is still at $135,000 in 2029/30, Shirley will pay an additional 7% tax on her $21,502 inflationary pay increase. That’s bracket creep! It’s easy revenue to prop up a deficient federal budget.

And it’s not just income tax. The Low-Income Tax Offset threshold, downsizer super concession and Division 293 thresholds have never been indexed, netting more budget revenue. Further, the proposed legislation to charge additional tax on super balances has a fixed threshold of $3 million. In a decade or so that tax will be eating its way into average retirement balances.

In a recent announcement that was vague at best, Peter Dutton hinted that the opposition would consider indexing our tax brackets at some time in the future when “our budget can afford to do so”. With an expected 2025 deficit of $27 billion, a budgeted 2026 deficit of $42 billion, and a national debt expected to hit $940 billion, I fear that’s a long way off. 

But it’s a thought bubble that’s creeping in the right direction.

by MARK DOUGLAS
FCPA
Managing Partner of Francis A Jones
www.faj.com.au