Clean Energy Future

4.1 How the Government will help households

Households will play an important role in the Government’s plan for a clean energy future.

To help households adjust to the introduction of the carbon price, more than half of the revenue raised will be given to them primarily in the form of tax cuts, higher family payments and increases in pensions and allowances. As a result, millions of households will be better off, even after business has passed through costs from the carbon price.

The package of household assistance, first and foremost, helps to ensure that the impact of a carbon price is manageable for low and middle income Australian households, especially those who have less financial room to adjust to change. It does this through cash assistance delivered through tax cuts and increased Government payments. Other parts of the household assistance package support incentives for households to adopt their own energy and cost saving measures. By adopting such measures, households will be able to save money as well as contribute to Australia’s clean energy future.

Figure 4.1: Overview of household assistance

The Government is also taking the opportunity of moving our economy to a clean energy future to reform the structure of the personal tax system, consistent with key recommendations of the 2009 Australia’s Future Tax System Review. These reforms will modernise the personal income tax system, making it simpler and more transparent. By cutting taxes, they will also improve incentives for and rewards from work, building on other recent Government measures to lift workforce participation. This represents a further response by the Government to the Australia’s Future Tax System Review’s overarching goals for reforming Australia’s tax and transfer system to meet the challenges of the 21^st century.

The Government will more than treble the statutory tax-free threshold to $18,200 in 2012, which will replace all but $445 of the existing low-income tax offset (LITO). The combined effect of the LITO plus the $18,200 tax-free threshold means that people will be able to earn annual income of up to $20,542 before they pay any net tax. The statutory tax-free threshold will be further increased to $19,400 in 2015, on transition to a floating carbon price. Together with a reduced LITO of $300, people with annual incomes of up to $20,979 willpay no net tax.

This will improve the rewards for work at low incomes.

As part of the changes, the statutory marginal tax rates will be more closely aligned with the hidden, effective rates that individuals actually pay. This increases transparency in the tax system.

In all, these tax cuts will mean that over 1 million people will be freed from the tax system. This means less time filling out tax forms, and more time to spend with their family.

It also means that workers earning less than the new tax-free thresholds will keep all of their wages in their regular pay packets, instead of waiting to receive some of it at the end of the financial year, as happens now. This will help workers make ends meet, while further improving immediate returns to work.

4.2 Reforming taxes and benefits

The Government will use more than half of the revenue raised from big polluters by the carbon price to help households. This assistance will be fair and permanent and it will be targeted at low and middle income households.

The average expected cost of living impact of the carbon price will be 0.7 per cent, or $9.90 per week. Households will receive a combination of increased payments or tax cuts, worth an average of $10.10 per week.

For single pensioners, the cost of living impactfor a pensioner with no other income is expected to be $204 in 2012-13. In 2012-13, this person will receive an increase in their pension of $338, more than offsetting their expected average cost of living increase.

The average cost of living impact for a family with two teenage school children, where each parent earns $50,000, is expected to be $653 in 2012-13. Through a combination of reductions in personal income tax and increases in the Government payments such as the Family Tax Benefit, the family will receive household assistance of $679.

Using the revenue from carbon pricing to help families in this way does not cancel out incentives to reduce pollution. Households will still face changes in relative prices, with goods made with fewer emissions becoming relatively cheaper. By choosing less carbon emission intensive goods and services, and taking simple actions to improve energy efficiency in their dailylives, households can save money. These savings will come on top of the increased tax cuts and payments that households will continue to receive.

4.2.1 Commitments to households

The Government wants to make sure low and middle income households can help take action on climate change without unduly bearing any costs. That’s why the Government is committed to ensuring:

• more than 50 per cent of the carbon price revenue will be used to assist households
• all assistance – payments and tax cuts – will be permanent and increase over time
• all low-income households will be eligiblefor assistance that at least offsets their expected average price impact from the carbon price
• middle-income households will be eligible for assistance that helps them meet their expected average price impact
• households with people who have a relevant concession card and face higher essential electricity costs due to a medical condition or disability will be eligible for additional assistance.

Table 4.1: Income definitions and proportion of households receiving assistance

These definitions are based on markers in the existing tax and transfer system, such as the point where the LITO begins to phase out($30,000) and the cut out of Family Tax Benefit B and the Baby Bonus ($150,000).

4.2.2 Assistance to households

Household assistance will be paid automatically through increasesin Government payments, such as pensions, allowances and Family Tax Benefit, and through tax cuts.

The assistance will mean:

• pensioners and self-funded retirees will getup to $338 extra per year if they are single, and $510 per year for couples,combined
• families receiving Family Tax Benefit Part A will get up to an extra $110 per child
• single income families with children will get up to$69 extra in Family Tax Benefit Part B plus up to $300 in an additional supplement
• allowance recipients will get up to $218 per year for singles, and $390 per year for couples, combined
• on top of this, all taxpayers with annual income of under $80,000 will get a tax cut, with most receiving at least $300 per year.

Tax reform – tax cuts and freeing over 1 million people from the tax system

Household assistance will be delivered to low and middle income individuals through a major structural reform of the tax system. This reform, consistent with the findings of the Australia’s Future Tax System Review, will increase the statutory tax-free threshold from $6,000 to $18,200 in 2012 – a more than threefold increase.

As a result of these changes:

• a person earning $20,000 a year will receive a taxcut of around $600, meaning that they will pay no net income tax
• a worker with annual income of around $25,000, will receive a tax cut of around $500
• most middle income earners will receive tax cuts of at least $300
• no person will pay more income tax.

This first round of tax cuts will provide a low income earner who does not receive any other payments from the Government with enough assistance to cover the average impact of the carbon price to the third year of the carbon pricing mechanism.

The Government will provide further tax cuts over time, to ensure the value of tax cuts always runs ahead of the impacts of the carbon price.

A second round of tax cuts will be delivered in 2015-16, through a further increase in the tax-free threshold to $19,400, when the fixed carbon price moves to an emissions trading scheme. These tax cuts will provide taxpayers earning up to $80,000 with a further tax cut, with most receiving at least $80per year. This will be sufficient to cover the expected carbon price impacts out to 2019-20.

These tax cuts will mean the rewards from working will increase, which will encourage more people to enter the workforce.

The reforms will simplify the personal income tax system for many people. After the two rounds of tax cuts, a tax-free threshold of $19,400 will mean that over a million people need no longer go to the effort of lodging annual tax returns.

The reforms will also make the personal income tax system more transparent. The LITO currently creates an additional hidden 4 per cent taxrate for taxpayers earning between $30,000 and $67,500. This is the result of how LITO is withdrawn as income increases. The new tax scales replace some of this with statutory tax rates that are more closely aligned with the effective tax rates that people actually pay. This will provide more transparent rewards for work, encouraging workforce participation. With more certainty over the tax treatment of additional income, people may reconsider and increase the number of hours they work.

The combined effect of the higher tax-free threshold and replacing the hidden LITO tax rate with statutory rates will target tax cuts to taxpayers with annual incomes up to $80,000. Those on higher incomes will pay no more tax as a result of these reforms.

The changes will be particularly important for secondary income earners who are already in the workforce or may re-enter the workforce on a parttime basis.

These tax cuts will be delivered upfront in people’s pay packets from 1 July 2012. The increases in the tax-free threshold also mean that workers under the new threshold will get to keep all of their wages in their regular paypackets, instead of waiting to receive some of it at the end of the financialyear, as happens now through the LITO.

Table 4.2: Statutory and effective taxation rates

Note: The point where LITO begins to phase-outwill move from $30,000 to $37,000.

Looking after families with children: increases to Family Tax Benefit

Assistance will be provided to people receiving Family Tax Benefit in two stages.

Firstly, families will receive an up-front lump sum advance in May-June 2012, while their regular Family Tax Benefit payments remain unchanged. This advance provides assistance for the period from the introduction of the carbon price on 1 July 2012 until 30 June 2013. The early payment will ensure that Family Tax Benefit recipients have cash assistance in their hands from the start of the scheme, to assist with the impact of a carbon price.

The advance delivers a lump sum equivalent to a 1.7 per cent increase in the relevant maximum annual rate of FTB. For example, a family with a child aged 13-15 will receive a tax exempt Clean Energy Advance of $109.50 in June 2012.

Then, from 1 July 2013, families will receive assistance through a new fortnightly, tax exempt supplement. The supplement will be equivalent to a 1.7 per cent increase in the relevant maximum annual rate ofFTB and indexed to CPI. People will be able to choose to receive the supplement on a fortnightly or quarterlybasis.

Assistance for families will also include the introduction of a new Single Income Family Supplement from 1 July 2012 which will provide upto $300 to assist eligible single income families who would receive little or no assistance through tax changes compared with dual income families with similar income.

Looking after people on pensions and allowances

Assistance will be provided to recipients of pensions and allowances intwo stages.

Firstly, pensioners and allowees will receive an up-front lumpsum in May-June 2012, while their regular payments remain unchanged. This advance provides assistance for the period from the introduction of the Carbon Pricing Mechanism on 1 July 2012 until 20 March 2013 for pensioners and most allowees.The tax exempt Clean Energy Advance ensures that pension and allowance recipients have cash assistance in their hands from the start of the carbon price.

The advance delivers a lump sum equivalent to a 1.7 per cent increasein the annual maximum rate of their pension. For example, the Clean Energy Advance for pensioners willbe $250 for singles and $190 for each member of a couple and paid in May-June2012.

Then, from 20 March 2013, pensioners and current allowees will receive assistance with the irregular payment. This assistancewill be delivered through a new fortnightly, tax-exempt supplement.The supplement will be equivalent to a 1.7 per cent increase in the maximum rate of their pension and indexed to CPI. People will be able to choose to receive the supplement on a fortnightly or quarterly basis.

Indexation adjustment

The new Clean Energy Supplement will be valued equivalent to a 1.7 percent increase in the relevant annual maximum payment rate for pensions, allowances and Family Tax Benefit.

This comprises an increase of 0.7 per cent from the extra indexation flowing from the higher Consumer Price Index due to the introduction of a carbon price, and a further 1.0 per cent increase in payments.

To prevent the double payment of indexation, there will be an adjustment to indexation arrangements in March 2013 for pensions and most allowances, July 2013 for Family Tax Benefit, and January 2014 for Youth Allowance, to allow the 0.7 per cent to be paid via the Clean Energy Supplement.

Looking after self-funded retirees

Commonwealth Seniors Health Card holders

Assistance will be provided to recipients of Commonwealth Seniors Health Card holders in two stages.

Firstly, Commonwealth Seniors Health Card holders will receive an up-front lump sum advance in May-June 2012, while their regular payments remain unchanged. This advance provides assistance for the period from the introduction of the price on 1 July 2012 until 20 March 2013 and istax exempt.

The advance delivers assistance of $250 for singles and $190 for each member of a couple.

From 20 March 2013, Commonwealth Seniors Health Card holders will be eligible for assistance delivered through a quarterly, tax-exempt supplement. The supplement will be equivalent to a 1.7per cent increase in the maximum rate of the pension and indexed to CPI. The new supplement will be paid with the existing Seniors Supplement.

Self-fundedretirees will also be eligible for the tax cuts outlined above.

Low Income Supplement

Low-income households that can show they might not receive enough assistance through tax cuts or Government payments to offset their averageexpected cost impact under a carbon price will be able to apply for an annual,tax-exempt Low Income Supplement of $300.

Essential Medical Equipment Payment

The Government is also introducing the Essential Medical Equipment Payment of $140 per year. This payment will be available to provide extra help for the eligible 110,000 people in Australia who face additional and unavoidable electricity costs owing to medical conditions or disabilities and hold a relevant concession card. People in this situation might use equipment such as a home dialysis machine, or they may have thermoregulatory dysfunctions which mean that they require additional heating or cooling to regulate their body temperature.

The $140 per year additional payment will cover the additional electricity cost impacts, associated with this essential medical equipment,faced under a carbon price. People affected can apply for this payment, which will supplement existing state and territory assistance for the cost of essential medical equipment.

Public housing

Assistance is not intended to be included in state government public housing rent setting calculations so that public housing residents get the full benefit of assistance.

Aged care residents and providers

Aged care providers bear many costs for their residents, including electricity, and will receive around half of the assistance paid through the age pension. Age pensioners living in aged care will receive the balance of the payment, to help them with increases in their other costs of living.

Because aged care fees are regulated, this arrangement will be implemented by increasing the basic daily fee by one percentage point of the maximum pension base rate.

These sharing arrangements are similar to those that were applied when the pension system was reformed, and the base pension rate was increased, in 2009.

The Government will ensure that aged care providers do not increase their fees in response to the carbon price for non-pensioner residents and will give aged care providers additional financial assistance in respect of these residents.

Reviewing the assistance

The tax cuts, increases in Family Tax Benefit and increases in pensions and allowances have been calculated based on the estimated average price impact for different household types. For example, the estimated average percentage price impact of pricing carbon is higher for a low-income household than a middle income household because on average they spend a larger share of their income on goods such as energy which will face a relatively higher percentage price increase due to a carbon price. Household assistance has been designed to meet the Government’s commitments that all low-income households will beeligible for assistance that at least offsets their expected average price impact from the carbon price, and middle-income households will be eligible for assistance that helps them meet their expected average price impact.

The Treasurer and the Minister for Families, Housing, Community Services and Indigenous Affairs will review the adequacy of thehousehold assistance package annually in the Budget context over the fixed price period. This review will examine the real value of the assistance provided in this package taking into account:

• movements in prices for the household consumption baskets used to calculate the assistance
• indexation arrangements for the assistance
• any new information about the composition of the goods and services that make up the average consumption basket.

4.3 The carbon price and the cost of living

The most well-known measure of the cost of living for Australiansis the Consumer Price Index (CPI), which measures movements in the prices ofconsumer goods and services. The carbon price is expected to increase the CPIby 0.7 per cent in 2012-13. The Goods and Services Tax (GST) andother related changes to the tax system had an impact on the CPI more thanthree times as large.

Figure 4.2: Price impact from the introduction of a carbon pricecompared to history

Source: Treasury, 2011 (core policyscenario).

The overall increase in prices is expected to be quite modest: the average increase in expenditure across all households is expected to be around $9.90 aweek in 2012-13. This includes an average estimated increase in household electricity expenditure of around $3.30 per week, and gas of $1.50 perweek. On average, food will go up by less than $1 per week forhouseholds.

The cost of living impact will vary across households. The Government’s household assistance package takes this into account.

Table 4.3: Effects on average weekly household expenditure of a $23 carbon price in 2012-13

Note. These estimates are averages. Actual expenditure may vary depending on household size, composition, preferences and energy sources.

After the carbon price is introduced, households can continue toc onsume the same things, but the carbon price means that they will have a financial incentive to consider alternatives. This is because the change in the prices of goods and services which are produced with relatively lower levels ofcarbon pollution will be less than the change in the prices of high-pollution goods and services. These price differences mean consumers will take carbonpollution into account when they make everyday decisions about what they buy. Aproduct made in a more energy-efficient factory will cost less than the same product from a less energy-efficient factory. Households choosing the first product will be rewarding cleaner production. In this way households will be supporting Australia’s move to a clean energy future – and household assistance will not blunt these price signals.

Figure 4.3: The causes of electricity price increases

Source: Treasury, 2011 (core policyscenario).

4.4 The opportunities for households

The Government has designed an ongoing household assistance package worth $14.9 billion over four years to be delivered primarily through tax cuts, higher family payments and increases to pensions and allowances.

This assistance package is targeted to deliver the most assistance to those who need it the most, low and middle income households and families. For millions of households this assistance will outweigh the price impact of a carbon price, including its impact on electricity prices.

In addition to helping families cope with the price impact,the Government will assist families to take advantage of the opportunities thatcome with a clean energy future. Using carbon price revenue to underwrite significant reforms to the personal tax system will mean that the carbon pricenot only delivers environmental benefits, but creates wider economic benefits, including increasing rewards from work and reducing disincentives in the tax system for workforce participation. The Government is also assisting households to improve energy efficiency which will save money from household budgets as well as reducing carbon pollution.

A carbon price, combined with tax cuts, higher family payments and increases in pensions and allowances and supported by Government programs to help with energy efficiency (Chapter 8), will give householders incentives to change their behaviour – butwithout imposing additional costs on those least able to afford it. If people want to, they will be able to use the assistance to maintain their existing spending patterns. But if they want to adjust their spending or to make investments in energy efficiency to reduce their household’s carbon pollution, then the assistance will help. Making sure 5.7 million Australian households are assisted to meet their average price impacts will ensure these households can play their part in building a clean energy future without having to make financial sacrifices along the way.

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Table 4.1: Income definitions and proportion of households receiving assistance

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Table 4.2: Statutory and effective taxation rates

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Table 4.3: Effects on average weekly household expenditure of a $23 carbon price in 2012-13

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