The federal government will use a budget update on Monday to ease the tax burden on older Australians who are forced out of their jobs, in a sign of a healthier outlook for the nation’s finances.
The change will help thousands of workers keep more of their redundancy payments at a later stage of their careers, ending rules that imposed a tax on those aged over 65.
The decision signals the scope within the government to ease taxes or increase spending as the budget recovers from a decade of deficits, with Prime Minister Scott Morrison promising a return to surplus in time for the election next May.
Treasurer Josh Frydenberg will outline the new rules on redundancy payments this weekend, ahead of the release of the mid-year economic and fiscal outlook, or MYEFO, in Canberra on Monday.
Current rules apply a tax-free component on redundancy and early retirement payments but this only applies if workers are younger than 65, while those who are older have to pay more tax.
Mr Frydenberg will announce new rules that lift the age limit in line with the wider policy of steadily raising the age pension qualifying age from 65 today to 67 in 2023.
The government estimates that someone who is over 65 today and has 10 years of service in a job and is made redundant would pay $15,000 in tax on the termination payment.
Under the new rules the same person would pay only $5640 in tax, saving $9360.
“Not only will this ensure older Australians keep more of the money they’ve earned, it will also support workforce participation by removing a barrier that may have prevented some from working longer,” Mr Frydenberg said.
The measure costs a relatively modest amount, $18 million over four years, but is another sign the underlying conditions are strong enough to sacrifice some tax revenue.
The government is expected to show an improvement in the budget bottom line in the Monday update, compared to the $14.5 billion deficit predicted for this financial year when the budget was issued in May.
Mr Morrison announced $1.25 billion in health spending on Wednesday, aiming to trump Labor with support for local health projects ahead of the election.
The budget papers forecast a $2.2 billion surplus in 2019-20 but an analysis by Deloitte Access Economics suggests there is room for a stronger bottom line if the government avoids heavy spending announcements ahead of the election.
Mr Morrison said on Friday the government would hand down a “budget in surplus for the first time in 12 years” when the document is released in April.
Shadow treasurer Chris Bowen said it was time for the government to reduce debt.
“With the most benign global economic conditions in decades, now is the time for Australia to be rebuilding the fiscal buffers and paying down debt,” he said.
“That is why Labor is putting forward fair budget reform and structural revenue measures that build over time – that not just pay for better schools and hospitals – but pay down debt.”
Mr Bowen said the budget improvements were largely driven by higher tax revenue.
The two major parties routinely argue over which side bears most responsibility for the Commonwealth debt. Labor presided over budget deficits worth $191.2 billion from June 2008 to June 2013, while the deficit was $48.5 billion in 2013-14 when both sides ran the country. The Coalition has overseen deficits worth $128.9 billion to June this year, not including the deficit predicted for this financial year.