How the 2025–2026 Tax Cut Affects Economic Loss Calculations in Personal Injury Matters

Tax rates might seem like background noise in a personal injury claim. The real focus, most people assume, is on gross wages, future care costs, and the applicable discount rate.

But income tax directly affects the net value of a damages award. And from 1 July 2024, Australian income tax rates changed in a way that materially affects how economic loss is calculated for claims involving tax years from 2025 onwards.

Ignoring this change, or using the old rates in a current assessment, will produce an incorrect net wage figure.

What Changed

For the financial years ending 30 June 2025 and 30 June 2026, Australia's income tax rate on earnings between $18,200 and $45,000 was reduced from 19% to 16%.

The full rate structure that applies for 2025 and 2026 is:

• Nil on income up to $18,200

• 16% on income over $18,200 up to $45,000

• 30% on income over $45,000 up to $135,000

• 37% on income over $135,000 up to $190,000

• 45% on income over $190,000

The Medicare Levy of 2.0% continues to apply.

This compares to the rate structure that applied from 2021 to 2024, where the second rate was 19% rather than 16%, the upper threshold for the 32.5% rate was $120,000, and the top threshold was $180,000.

Why This Affects Damages Calculations

Loss of earnings claims are typically calculated on a net basis. That is, the plaintiff is compensated for what they would have received after tax, not the gross figure before tax.

If the wrong tax rates are applied, the net weekly wage will be incorrect. Using the 19% rate from the old scale for a 2025 or 2026 assessment period will understate the plaintiff's net wage and therefore understate their economic loss.

For a plaintiff earning $60,000 per year, the difference in income tax between the old and new rate structures is meaningful. The reduction in the marginal rate from 19% to 16% on earnings between $18,200 and $45,000 produces an annual tax saving of approximately $804. This flows directly into the net weekly wage figure.

How It Affects Past Loss Assessments

In matters where the past loss period spans the transition from the old rate structure to the new one, it is important to apply the correct tax rates for each relevant year.

Using today's rates for income earned in 2022 or 2023 will produce an overstated net wage for those earlier years. Using the old rates for income from 2025 onwards will understate it.

The correct approach is to identify which tax year each period of loss falls into and apply the rates that applied during that year.

Low Income Tax Offset and Medicare Levy

In addition to the standard rate thresholds, the net weekly wage calculation must also account for the Low Income Tax Offset. This offset reduces the effective tax on lower incomes and affects the net wage at the lower end of the income scale.

At DB Forensic, our net weekly wage calculations incorporate the Low Income Tax Offset and the Medicare Levy for each applicable tax year, ensuring that the net figure reflects the correct after-tax position.

What This Means for Future Loss Projections

For future loss of earnings, the current tax rates apply unless there is a specific reason to assume they will change. From a practical standpoint, most future loss projections in current matters should apply the 2025 and 2026 rate structure.

This is consistent with applying the best available current information to the projection.

The Risk of Using Outdated Tables

Net weekly wage tables that were correct under the 2021 to 2024 rate structure are no longer accurate for the current period. Reports or schedules that rely on older tables without updating for the rate change will produce incorrect figures.

At DB Forensic, we update our calculations each year to reflect current tax rates and use correct historical rates for assessments that cover earlier periods.

Questions About Tax Rates in Your Economic Loss Report

If you are reviewing an economic loss report and want to confirm that the current or applicable tax rates have been correctly used, DB Forensic can help.