How Will the Stage Three Tax Cuts Impact You?

In response to the cost of living crisis, the Federal Government announced on 25 January that the stage three tax cuts would be coming into effect on 1 July 2024 — albeit with some changes. The changes to the tax cuts were designed to improve outcomes for lower and middle-income earners, meaning Australian taxpayers will be able to keep more of their hard-earned money. 

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What are the stage three tax cuts?

Back in 2019, the Morrison government's tax cuts were designed to be rolled out in three stages, with the goal of reducing 'bracket creep'. 'Bracket creep' is the term used to describe when Australian taxpayers are pushed into a higher tax bracket because of rising wages. If inflationary pressures are driving the wage growth, real income hasn't increased at all, but taxpayers are being forced to pay a higher proportion of income tax. 

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The original three-phase plan was as follows:

• Stage one offered a low-and middle-income tax offset break of up to $1,080, ending in June 2022. Australians earning between $30,000 and $126,000 were eligible to receive the offset. 
• Stage two was brought forward from its original commencement date of July 2022 to July 2020. The 32.5% tax bracket was changed from its previous $37,001-$90,000 to $45,001-$120,000. This was designed mainly benefit low and middle-income earners. 
• Stage three was originally designed to completely abolish the 37% marginal tax bracket, and lower the 32.5% marginal tax rate to 30%. It was also going to raise the threshold for the highest, 45% marginal tax rate from $180,000 to $200,000. This would have seen everyone earning between $45,000 and $200,000 paying the same 30% tax rate. 

The cuts are estimated to reduce the government's tax revenue by $243 billion over a decade — leaving this money in the taxpayers pockets. 

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Changes to Stage Three

The estimated $243 billion tax revenue reduction remains the same, however, the Albanese government has made changes to the tax brackets that more strongly favour low and middle-income earners.

The most significant change is the decision to keep the 37% tax bracket. However, the upper limit will increase to $190,000 up from the current financial year's $180,000. 

Low-income earners will also benefit from the projected 7.1% rise in the Medicare Levy low-income thresholds. It is expected that the 2% Medicare Levy will no longer be applicable at $26,000 of earnings, but at $32,500. 

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Tax bracket comparisons

When you compare the current tax rates to the new stage three tax cut, it’s clear that there are some very welcome tax cuts just around the corner. While everyone gets a tax cut, the new changes mean that taxpayers earning less than $150,000 get a larger cut, and those earning more than $150,000 still enjoy a tax cut, however it is lower than the previous Stage Three tax cut. 

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If you would like to discuss how the proposed stage three tax cuts might impact you, please get in touch with us today. 

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