Insights

The 2026–27 Federal Budget, handed down on 12 May, continues the Government’s focus on cost‑of‑living relief for working Australians through a combination of personal income tax cuts, simplified deductions, and a new permanent tax offset.

While the headlines refer to “tax cuts for everyone”, the detail matters. The impact differs depending on whether income is derived from employment, business, investments or retirement, and on how existing offsets already apply. Below is a closer look at what has changed, when it applies, and what it means in practice.

Changes to personal income tax brackets

As previously legislated, the tax rate on the second marginal income range will reduce by 1% from 1 July 2026. All other rates remain unchanged:

As a result, anyone earning $45,000 or above will see the maximum tax saving of $268 per year. For those earning below this level, the saving scales downwards proportionately.

A further reduction of this bracket to 14% from 1 July 2027 has already been legislated, doubling the maximum saving to $536 per year compared to the 2024–25 tax rates.

The Working Australians Tax Offset (WATO)

The most significant new personal tax measure in the Budget is the introduction of the Working Australians Tax Offset (WATO).

Key features:

• A permanent tax offset of up to $250 per year
• Applies from the 2027–28 income year
• Available to individuals who earn income from:
  • Wages and salaries
  • Sole trader business income
• Automatically applied when tax returns are lodged
• 97% of eligible workers are expected to receive the full $250 offset

Importantly, this is a tax offset, not a deduction. It reduces tax payable dollar‑for‑dollar, rather than reducing taxable income. Thus, the offset increases the effective tax‑free threshold:

• From $18,200 to approximately $19,985 for most workers
• Up to $24,985 for those also eligible for the Low Income Tax Offset (LITO)

As suggested by the name, this offset does not apply to anyone not in receipt of income traditionally linked to working, including

• Retirees with no employment or business income

• Individuals earning income solely from investments
• Many self‑funded retirees drawing from superannuation pensions

This distinction is important for households with mixed income sources, where one spouse may benefit while the other does not. 

Interaction with other offsets and deductions

The WATO operates alongside existing measures, including:

• Low Income Tax Offset (LITO) – unchanged
• Seniors and Pensioners Tax Offset (SAPTO) – unchanged
• $1,000 Instant Tax Deduction for work‑related expenses from 2026–27, announced in last year’s Budget.

As a reminder, the $1,000 instant deduction simplifies claims for employees with modest work‑related expenses, delivering an average tax saving of around $205 without the need to retain supporting receipts.

What does this mean in practice?

For many clients, the combined effect of:

• The 1% marginal rate reduction
• The $1,000 instant tax deduction
• The new $250 tax offset

will result in meaningful but incremental improvements to after‑tax cashflow, rather than a single large benefit.

For higher‑income earners, the absolute dollar benefit is capped, while for lower‑income workers the increase in the effective tax‑free threshold can materially reduce or eliminate tax payable.

From a planning perspective, these measures:

• Slightly improve cashflow for workers
• Do not materially alter marginal tax rates above $45,000
• Reinforce the importance of structuring income sources, particularly approaching retirement

What should you do next?

While the changes to tax brackets and the new Working Australians Tax Offset provide welcome relief, their impact will vary depending on how your income is structured. If you are approaching retirement, running a business, or have multiple income sources, we recommend speaking with your adviser to understand how these changes fit within your broader tax, cashflow and long‑term financial strategy.

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