The Updated Stage 3 Personal Income Tax Cuts for Australian Taxpayers

Stage 3 Personal Income Tax Cuts were part of the government’s plan to simplify and flatten the tax system. When Stage 3 tax cuts take effect in July 2024, they will be the most costly and inequitable tax cuts in Australian history, costing $320 billion in lost tax revenue in their first ten years.

Read: How to Reduce Your Personal Tax

Stage 3 Tax Cuts Redesigned

The Prime Minister has said that the Government will modify the legally mandated Stage 3 tax cuts, which are set to take effect on July 1, 2024, following a great deal of conjecture. By concentrating on people with taxable incomes under $150,000, the suggested redesign will increase the advantages of the tax cut compared to the current Stage 3 plan. It is projected that, should legislation be passed, an extra 2.9 million Australian taxpayers would receive higher pay packets starting on July 1.

Although this is not how Stage 3 of the five-year plan for restructuring the personal income tax system was intended to operate, a dramatic increase in living expenses has changed the views of the community. According to the prime minister, “we are focused on the here and now,” which naturally means that long-term structural change is not a priority.

Read: The Key Financial Challenges and Influences You Should Care About in 2024

As bracket creep takes its toll, the redesign will raise government revenues from personal income tax by an estimated $28 billion to 2034–2035.

 

What is going to alter?

Redistributing the reforms to lower-income households, who have been disproportionately affected by pressures related to the cost of living, is the goal of the updated tax reduction.

Tax Rate	2023-2024	2024-25 Legislated	2024-25 Proposed
0%	$0 – $18,200	$0 – $18,200	$0 – $18,200
16%			$18,201 – $45,000
19%	$18,201 – $45,000	$18,201 – $45,000
30%		$45,001 – $200,000	$18,201 – $45,000
32.5%	$45,001 – $120,000
37%	$120,001 – $180,000		$135,001 – $190,000
45%	>$180,000	>$200,000	>$190,000

 

In comparison to the current Stage 3 plan, all resident taxpayers with taxable income under $146,486 who would genuinely owe income tax would enjoy bigger tax relief under the proposed redesign. As an illustration:

Under the current Stage 3 plan, an individual with $40,000 in taxable income will receive a $654 tax cut as opposed to receiving no tax cut (albeit they will probably have benefited from the tax cuts at Stages 1 and 2).

Compared to the existing Stage 3 plan, an individual with taxable income of $100,000 would receive a tax cut of $2,179, or $804 more.

But the benefit of the Stage 3 plan will be reduced for a person making $200,000 to about half of what was anticipated, from $9,075 to $4,529. Though not to the same extent as with the existing tax rates, there is still an advantage.

The Medicare Levy low-income threshold increased by 7.1% in step with inflation, providing extra assistance for low-income individuals. It is anticipated that a person will begin paying the Medicare Levy when their income hits $26,000, and that they will wait until $32,500 (for singles) to pay the full 2% of the levy.

The proposed redesign aims to be about revenue neutral when compared to the current planned Stage 3 plan; nevertheless, before bracket creep starts to decrease, it will cost an additional $1 billion over the following four years.

 

It’s still not certain!

By July 1, 2024, the government will need to swiftly pass amending legislation in order to implement the revised Stage 3 tax cuts. To get it past Parliament, which will convene on February 6, 2024, it will be necessary to win over independents and small parties.

 

How did we get here?

The personal income tax plan was first introduced in the Federal Budget for 2018–19. Its purpose was to address the very real problem of “bracket creep,” which occurs when tax rates rise faster than salary growth, resulting in an increase in the amount of tax that individuals must pay over time. In order to simplify tax thresholds and rates, lower the tax burden on many individuals, and bring Australia into compliance with some of our neighbors—New Zealand, for example, has a top marginal tax rate of 39% that applies to incomes over $180,000—the three-point plan aimed to restructure the personal income tax rates.

The three-point plan is scheduled to go into force on July 1, 2024, with stage 1 bringing incremental adjustments on July 1, 2018 and July 1, 2020.

 

Now, what?

Please call 03 9583 0550 to discuss any concerns you may have about the proposed changes.

For tax planning reasons, the revised Stage 3 tax cuts provide fewer planning opportunities than the current plan for individuals with taxable income of $150,000 or more. Any change in tax rates, however, provides an opportunity to examine and reset your finances to make sure you are making the most of your opportunities and aren’t overpaying.

Download your copy of the Stage 3 personal income tax cuts redesigned article here.

 

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