One-off tax cut in play as Albanese keeps budget options open

A one-off tax break for working Australians remains a live option for cost-of-living relief, with Labor ministers being careful not to rule it out ahead of the federal budget.

Prime Minister Anthony Albanese declared the federal government's May 12 budget would be "consistent with Labor's values" when asked about a reported plan to deliver an income tax offset this financial year.

"It's a whole lot of speculation out there in budgets, and that's what happens," Mr Albanese said.

"Some of it's right, some of it's wrong."

The Australian today reported Labor was preparing to announce an earned income offset of between $200 and $300 for every Australian worker who pays tax.

The report said the measure would be for the next financial year and only apply to earned income from work, rather than from investments.

Pushed on the offset proposal, Mr Albanese said the budget would be "consistent" with Labor's mantra of "no-one left behind and no-one held back".

Asked about the income tax offset, Treasurer Jim Chalmers said speculation about the budget was "not always right".

"I don't intend to add to that specific speculation today except to say that we are already cutting taxes," he said.

Shadow Treasurer Tim Wilson has warned the measure could fuel inflation, but stopped short of saying the Coalition would not support an income tax offset.

"We can't until I see the detail, but we know the consequences," he told Channel Seven.

"The [International Monetary Fund] has said if you go down this path, it will fuel inflation.

"It will give with one hand and then take even worse and harder with another."

Albanese says voters can be judge of budget tax changes

The federal government is widely expected to rein in property tax settings by slashing negative gearing and the capital gains tax discount.

Though both changes would be grandfathered to minimise the impact on Australians currently benefiting from the current tax rates, ahead of the 2025 election the prime minister had vowed he would not touch negative gearing.

Asked how Labor would build trust with voters after breaking such an election promise, Mr Albanese said Australians would be able to decide for themselves.

"What we're doing is handing down a budget on next Tuesday … and people will make their own mind up about the decisions that we have made," he said.

"We have made decisions across the board, on savings, you'll see expenditures, you'll see us work through a budget that is consistent with Labor principles and consistent with strengthening the economy, but also looking after people on the way through."

Income tax offset 'sensible' form of relief

Before reports of the income tax offset, Treasurer Jim Chalmers yesterday suggested cost-of-living measures would be limited to existing announcements.

This included the temporary reduction of the fuel excise, due to end on June 30, as well as modest top-up tax cuts legislated last term that take effect in two stages from July 1.

"Government spending, as I've said on heaps of occasions, is obviously part of aggregate demand," Mr Chalmers said.

"Where we can play a helpful role rather than a harmful role in the amount of aggregate demand in the economy, obviously, we look for ways to do that."

AMP chief economist Shane Oliver told the ABC an income tax offset was a "better way" to provide households with cost-of-living relief than the fuel excise cut.

"The fuel tax reduction just removed the price signal to use less fuel," he said.

Mr Oliver said the speculated figure of up to $300 for the majority of Australian workers was "modest in the scheme of things".

"There might be concern about inflation, but by the same token, it's not big, and it will provide some help," he said.

Mr Oliver said he would be a "little surprised" if the offset was not means-tested as during times of high inflation, it was better to target financial assistance.

"The main people who would be excluded would be self-funded retirees or people who get all income from assets," he said.

"It would make more sense to means test it."

Tax cut for wages only

Unlike a regular tax cut, an offset for "earned" income would only apply to wages and salaries, excluding "passive" income from investments.

Similar tax credits exist in other countries as a more targeted way to give tax relief to workers rather than to those who are collecting income from assets they own, such as trust beneficiaries and retirees.

Economists have long called for a "dual" income tax system in which active and passive income are taxed separately.

Australian National University tax experts Robert Breunig and Peter Varela called it an "ideal system" in an influential 2025 paper.

Greg Kaplan of the e61 Institute has said Australia's tax system taxes wages too highly.

"The absolute worst case you can be in is to earn all your income as an employee working for somebody else," he told independent Allegra Spender's roundtable last year.