With the Coalition agreeing to the revisions, the government’s stage 3 tax cuts are set to return hundreds of dollars to low- and middle-income Australians at the expense of wealthier Australians.
As interest rates are expected to ease in the second half of the year, Australian Broker asked two mortgage experts about what implications the revised tax break will not only have for borrowers and the economy but how brokers can approach it with their clients.
How HEM and bracket creep erode borrowing power
Despite breaking a campaign promise, Albanese's revised tax plan could help most Australians. The Grattan Institute reported 90% of taxpayers will keep or increase their tax cut, with low- and middle-income earners seeing the biggest boost.
However, Damian Brander (pictured above left), managing director of Australian Lending & Investment Centre (ALIC), argued that these benefits will largely be negated by increasing living expenses and HEM benchmarks.
“With much higher household debt burdens for clients given the housing price increases over the past 10 years, Australian borrowers are being restricted from accessing finance more and more, mainly due to the inflated assessment buffer rate of 3%,” Brander said.
“Stage 3 tax cuts were implemented five years ago to address bracket creep for borrowers that have a combined higher income… The proposed changes to stage 3 will mean some borrowers will continue to be negatively affected.”
This bracket creep occurs because Australia’s tax system is not indexed to wage growth or inflation. This means that as incomes increase to compensate for rising inflation, Australians pay a higher proportion of their income in tax.
However, when it comes to the household expenditure measure (HEM), a benchmark used by many lenders in Australia to estimate a loan applicant's annual expenses and assess their borrowing capacity for a home loan, it’s a different story.
As Todd Sarris (pictured above right), mortgage adviser at Spartan Partners, explained, these HEM calculations typically pivot in line with inflation.
“Given ABS inflation still increased +4.1% in the 12 months to December 2023, HEM will be recast upwards in the upcoming quarter higher,” Sarris said. “Thus, as inflation remains high, HEM will keep getting re-pitched at higher levels and effectively eat into borrowing capacity.”
The risk for mortgage brokers
Despite Australia reaching peak interest rates, APRA’s 3% serviceability buffer has continued to restrict homebuyers.
So, when public conversation began about the stage 3 tax cuts, mortgage brokers took to LinkedIn to express excitement about these cuts potentially increasing borrowing power.
However, Sarris warned brokers against a concerning trend.
"Mortgage brokers sharing simple borrowing calculations on social media (like Excel snippets) via their videos are straddling the incredibly fine line of going beyond their licensing in providing personal finance advice,” he said.
As mortgage experts, Sarris believes the role of brokers is to “continue our backseat approach to tax” and “strive to understand our clients’ needs and goals”.
“We really shouldn’t be taking a proactive approach with imminent stage 3 tax cuts starting from July this year,” Sarris said.
“Instead, we should support with borrowing capacity and ultimately structure a facility that best meets a client’s situation now and into the future.”
Instead, Brander said PAYG clients “only have one way” to minimise the tax they pay and from being impacted by bracket creep, and that is negative gearing.
“Unlike a business that uses a P&L balance sheet to report expenses and profit along with an after you earn tax method, PAYG is already taken from your salary before you receive it,” Brander said.
“Leveraging income and equity to invest in property is a proven strategy to help avoid bracket creep and excessive tax burdens, especially with you had a $5,000 pay rise and end up paying most if not all of that in additional taxes by creeping over to the higher tax bracket.”
How will the mortgage market react to the stage 3 tax cuts?
Though both Sarris and Brander support helping vulnerable consumers and a fair tax system, they predict potentially negative long-term effects from the tax cuts.
“Additional funds in consumer pockets that have a higher propensity to spend (lower- and middle-income earners) has to be net inflationary (even if exceptionally marginally),” said Sarris. “Instead, I believe the federal government would have been far better placed to develop targeted support for vulnerable consumers instead of a blanket approach.”
Brander agreed, saying the stage 3 tax cuts will likely contribute to higher inflation, which could keep rates “higher for longer”.
“Though income tax breaks might seem attractive, with high household debt, rising property prices due to limited supply and immigration, growing living costs, and inflation exceeding the target range, these concessions for low and middle earners may not immediately boost their borrowing power,” Brander said.
While many may have gawked at the $28 billion price tag of the revised stage 3 tax cuts, Sarris said it has to be seen in a wider context.
“Our incredibly large economy is ~$1.7T nominal GDP. Converting $28b / $1.7T has a lot of zeros,” Sarris said.
“So it is exceptionally significant to consumers, but, in wider context, not that significant.”
