Background

The stage 3 tax cuts were part of the former Government’s seven-year personal income tax plan announced in the 2018/19 Federal Budget. These measures were subsequently legislated and further revised in subsequent years.

At a high level, the seven-year personal income tax plan involved three stages:

• Stage 1 and stage 2 tax cuts focused on low and middle income earners which:

– implemented the temporary low and middle income tax offset (LMITO) to reduce the tax payable by low and middle income earners from the 2018/19 to 2021/22 financial years;

– permanently increased the amount of low income tax offset to a maximum of $700 (from $445) since the 2020/21 financial year; and

– increased the personal income tax thresholds for the 19% marginal rate to $45,000 (from $37,000) and the 32.5% marginal rate to $120,000 (from $90,000) since the 2020/21 financial year.

• Stage 3 tax cuts commencing on 1 July 2024, amended personal income tax rates and thresholds to provide tax relief for higher income earners by replacing marginal tax rates for taxable income from $45,000 to $200,000 with a flat 30% marginal tax rate. The maximum tax cut of $9,075 applies to those with taxable income of $200,000 or higher.

The Bill introduced to Parliament on 6 February 2024, amends the stage 3 tax cuts so that the tax rates and thresholds applying from 2024/25, provides higher tax cuts to lower income earners and lower tax cuts to higher income earners.

What are the proposed changes to the stage 3 tax cuts?

Australian tax residents

If legislated, the proposed changes to the stage 3 tax cuts will make the following changes to tax rates and thresholds in 2024/25 compared to the current financial year (2023/24):

• reduce the current 19% tax rate to 16%

• reduce the current 32.5% tax rate to 30%

• increase the current threshold above which the 37% tax rate applies from $120,000 to $135,000

• increase the current threshold above which the 45% tax rate applies from $180,000 to $190,000

The table below compares the resident tax rates in 2023/24 to the proposed tax rates from 2024/25 onwards:

How much are the tax savings under the proposed changes?

The table below shows the tax savings a resident taxpayer will receive from 2024/25 under the proposed stage 3 tax cuts, based on different levels of taxable income compared to the current year’s tax rates…

Comment:

The proposed stage 3 tax cuts effectively mean that from 1 July 2024:

• All individuals with taxable income above their effective tax-free threshold will pay a reduced amount of tax from next year.

• Certain levels of taxable income will be taxed at the same marginal tax rate in 2024/25 compared to 2023/24, however, taxpayers in these categories may still receive a tax cut due to the 19% tax rate reducing to 16% and the 32.5% tax rate reducing to 30%. More specifically:

– Taxable income between $135,000 and $180,000 will be taxed at the same marginal tax rate of 37%, however, individuals with this level of taxable income will receive a flat rate of tax-cut of $3,729 each year.

– Taxable income exceeding $190,000 will be taxed at the same marginal tax rate of 45%, however, individuals with this level of income will receive the maximum tax-cut of $4,529 each year.

Rick Maggi