February 2, 2024

Redesigned Stage 3 tax cuts

The personal income tax cuts due to commence on 1 July 2024 will be amended under a proposal released from the Australian government. Here’s what those changes mean for you…

After much speculation, the Albanese government has announced that it intends to amend the legislated Stage 3 tax cuts scheduled to commence on 1 July 2024. The good news is that if you’re an Australian taxpayer, you’ll pay less tax from July. The bad news is that for some, the impact will be less favourable than it would have been prior to the redesign.

What are the Stage 3 tax cuts?

The Stage 3 tax cuts are the third round in a series of tax changes introduced by the then-Coalition government in 2018 and 2019. The first and second stages were introduced a few years ago. Under that legislation, the third stage is due to take effect in July.

What are the changes?

The Albanese government has proposed some amendments to the next round of tax cuts. These changes redistribute the reforms to benefit lower income households that have been disproportionately impacted by the cost-of-living pressures. Under the proposed redesign, all resident taxpayers with a taxable income under $146,486 will receive a larger tax cut compared with the existing Stage 3 plan.

The proposed changes will impact Australians differently, depending on their taxable income, for example:

1. An individual with taxable income of $40,000 will receive a tax cut of $654, in contrast to receiving no tax cut under the current Stage 3 plan (but they are likely to have benefited from the tax cuts at Stage 1 and Stage 2).

2. An individual with taxable income of $100,000 would receive a tax cut of $2,179, which is $804 more than under the current Stage 3 plan.

3. An individual earning $200,000 will have the benefit of the Stage 3 plan slashed to around half of what was expected from $9,075 to $4,529. There is still a benefit compared with current tax rates, just not as much.

There is additional relief for low-income earners with the Medicare Levy low-income thresholds expected to increase by 7.1% in line with inflation. It is expected that an individual will not start paying the 2% Medicare Levy until their income reaches $32,500 (up from $26,000). While the proposed redesign is intended to be broadly revenue neutral compared with the existing budgeted Stage 3 plan, it will cost around $1 billion more over the next four years before bracket creep starts to diminish the gains.

The below chart shows the different tax cuts on salaries between the original Stage 3 plan and the revised option, with the tax cut level depicted on the vertical axis:

Chart: Tax cut from Stage 3 and recommended option in 2024–25, compared to 2023–24 policy settings

Note: Calculation for Australian resident taxpayers. Data available in Table A1 in the appendix. Source: Treasury analysis.

The redesign breaks an election promise not to touch the Stage 3 tax cuts and will mean the highest income earners will effectively get half the benefit they were due to receive. But all 13.6 million Australian taxpayers will enjoy a little tax respite in their payslips from July 1 to varying degrees.

Call us on (02) 9739 6555 if you’d like to speak with one of our friendly tax experts for advice if you have any concerns about how the proposed changes may impact you.

Please note, the above information does not constitute financial advice and does not take into account your current circumstances or goals. Please speak with a financial adviser before acting on any information found here or throughout the 5 Financial website.

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