Stage Three Tax Cuts: How Much Will You Receive?



Prime Minister Anthony Albanese has unveiled changes to stage three tax cuts—the biggest and most controversial phase of income tax cuts in Australia—in a bid to expand benefits for lower and middle-income workers.

The government’s decision, confirmed in January, to change the make-up of the stage three tax cuts has preoccupied headlines ever since. After much debate in Coalition ranks, the Liberal party didn’t block the passage of the new laws and they formally passed the Senate and into law on February 27. They will take effect at the start of the financial year on July 1.

So, what exactly are the stage three tax cuts, why have they been so controversial and why was the government willing to face political heat to change them?


What Are the Stage Three Tax Cuts?

The stage three tax cuts are the third phase of changes to income taxation legislated by the centre-right Morrison government in 2019, with support from the then opposition Labor party (despite its reservations).

The tax cuts framed by the former Coalition government were mainly designed to offset the impact of ‘bracket creep’, when rising incomes push workers into the next tax bracket, forcing them to pay a higher proportion of income tax despite no change to their real income due to inflationary pressures.

The 2019 plan had three phases:

Stage one was a temporary low-and middle-income tax offset (LMITO), which provided a tax break of up to $1,080 for taxpayers earning between $30,000 and $126,000. It ended in June 2022.

Stage two lifted the tax bracket at which the 32.5% rate applied to $45,001 to $120,000, from $37,001 to $90,000 previously, mainly benefiting those on low and middle incomes. This change was originally meant to apply from July 2022, but was brought forward to July 2020.

Stage three was meant to abolish the 37% marginal tax bracket completely and lower the 32.5% marginal tax rate to 30%. It would also raise the threshold for the top 45% marginal tax rate from $180,000 to $200,000, meaning everyone earning between $45,000 and $200,000 would pay the same 30% tax rate. It would apply from July 1, 2024.

At the end of the former government’s restructuring, the tax brackets would have looked like this:

Original Stage Three Tax Brackets

While the proposal sailed through parliament, it attracted widespread criticism from both activists and tax experts for its high cost and because it was seen to be delivering bigger tax cuts to those on higher incomes. The stage-three tax cuts are estimated to cost the government $243 billion in lost tax revenue over a decade.



Changes to the Stage Three Tax Cuts

While the overall cost of stage-three remains the same, the Albanese government has scaled back tax cuts for those on higher incomes in favour of low and middle-income earners.

The biggest change compared to the original plan is that the 37% tax rate is retained, albeit with a higher upper limit of $190,000. In return, the two lowest brackets at which tax is paid have also been reduced.

Under the Labor government’s new proposal, the tax brackets will look like this:

Revised Stage Three Tax Brackets

The decision is seen as controversial and politically-risky for the government, because Labor had pledged to keep the legislated tax cuts unchanged ahead of the 2022 election and had reiterated its commitment since.

However, after announcing the volte-face, Albanese argued he was willing to break a key election promise, based on the changed economic reality confronting many Australians at the start of 2024 and that the changes will deliver cost-of-living relief for low and middle-income earners.

Australia’s inflation eased to 4.1% in the December quarter after peaking around 8% in 2022. Most recently, monthly CPI is now at 3.4% for the year to January, according to the latest ABS data. The RBA’s target band is 2% to 3%.

The government said the original tax-cuts plan was designed five years ago, before the pandemic, as well as prior to the global inflation spike and interest rate increases that have resulted in economic uncertainty and the spectre of recession.

“When economic circumstances change, the right thing to do is change your economic policy. That’s what we are doing,” Albanese said at the time.

“We have found a more responsible way to ensure more people get a bigger tax cut to help ease the pressure they are under.”

He also added that a budget surplus delivered last fiscal year had helped make the changes possible.


What will they mean for you from July 1?

Under the existing system, Australians pay income tax at various following rates:

Current Australian Tax Brackets

Under its revised proposal, the government will still cut the 32.5% tax rate to 30%, but will retain the 37% tax rate on a wider income bracket. It says all taxpayers will receive a tax cut, with lower and middle-income earners to benefit the most.

Broadly, that means all taxpayers earning less than $150,000 a year will receive a larger tax cut than they would have done under the original stage three plan, while those earning more than $150,000 will receive a lower tax cut than previously estimated.

For example, a person earning the average Australian salary of around $80,000 a year will now receive a tax cut of $1679 instead of a cut of $875 under the original stage three plan. By contrast, a person earning $200,000 a year will now get a tax cut of $4529, instead of $9075 envisaged in the original plan.

The Size of Your Tax Cut (excluding Medicare Levy)

The result will be a broadening of tax cuts towards low and middle income taxpayers, who have felt a bigger impact of the cost of living pressures and who are far more numerous than high-income earners. According to Treasury estimates, the redesign of stage three will now provide relief to 13.6 million taxpayers overall.

Treasurer Jim Chalmers says he has discussed the changes with RBA Governor Michele Bullock, who does not expect the tax changes to have any impact on the central bank’s inflation forecast.

Opposition leader Peter Dutton spent weeks lambasting the PM for reneging on his promise not to tinker with the tax cuts, but in the end his party decided to not block the Bill’s passage through the Senate. However Dutton has indicated he will unveil a new take policy to take to the next federal election. Prime Minister Anthony Albanese welcomed further detail on these tax cuts

“We made sure that this plan costs $107 billion. That’s around about the same amount (as the original stage three plan), we thought that was important,” he said.

“If the Liberals are going to have tax cuts, they have to say… where will the cuts be for services?”.

CREDIT: Article originally written by Prashant Mehra for Forbes Advisor.

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