Stage 3 tax cuts vs proposed changes

The talk about the stage 3 tax cuts has reached a fever pitch in recent days. The changes were originally legislated by the previous government in 2019 with the support of the then Labor opposition. During the election campaign and since coming into government, the Prime Minister had reassured voters on multiple occasions that the stage 3 tax cuts would remain. However, with the recent inflationary stressors, the government has been under increasing pressure to scrap the already legislated tax cuts in favor of cost-of-living relief for low to middle income earners, which would require the introduction of amending legislation.

As a refresher, stage 3 tax cuts are due to come in place from 1 July 2024, and will benefit individuals that earn above $45,000 of taxable income. Under the current rates, individuals who earn between:

$0 and $18,200 pay no tax;
$18,201 and $45,000 are taxed at 19% of excess over $18,200.
$45,001 and $120,000 are taxed at $5,092 plus 32.5% of the excess over $45,000;
$120,001 and $180,000 are taxed at $29,467 plus 37% of the excess over $120,000; and
$180,001 and more are taxed at $51,667 plus 45% of the excess over $180,000.

From 1 July 2024 however, (under the current legislated Stage 3 changes) those earning taxable income between $45,000 and $200,000 will be taxed at $5,092 plus 30% of the excess over $45,000. In addition, individuals who earn $200,001 and more are taxed at $51,592 plus 45% of the excess over $200,000.

According to the latest ABS data, the median earnings of full-time Australian workers are around $1,600 per week equating to $83,200 per year. Under the current rates, this worker would be paying $17,507 in tax; however, when stage 3 tax cuts come into play for the 2024-25 income year, this same worker would only be paying $16,552, a saving of $955.

Of course, as the critics of the tax cuts have pointed out, those earning more will be saving more. For example, the same ABS data indicates that individuals earning $2,820 per week are in the 90th percentile of workers in Australia. This figure equates to annual earnings of $146,640 and under the current tax rates, this worker would be paying around $39,323. When the stage 3 tax cuts come into place, this worker will only be paying $35,584, a tax saving of around $3,739.

This effect becomes even more pronounced at the edge of the stage 3 threshold of $200,000. These individuals would experience a tax saving of a whopping $9,075 ($60,667 in tax under the current rates vs $51,592 under the stage 3 tax cuts).

Under the government’s proposed changes, those earning between $18,201 and $45,000 will see their tax rate reduced from 19% to 16%. In addition, those who earn between $45,001 and $135,000 will be taxed at the new marginal tax rate of 30%, and the existing 37% marginal rate will be retained but will apply to individuals earning between $135,001 and $190,000. The top marginal rate of 45% will also remain for those who earn $190,001 and above.

An average worker earning $83,200 per year will be better off under the government’s proposed changes, paying around $15,748 in tax versus $16,552 under stage 3 and $17,507 under the current rates. While those in the 90th percentile of workers will be slightly worse off under the proposed changes ($35,594 in tax) compared to stage 3 ($35,584 in tax), they will still be better off than under the current system ($39,323 in tax).

The government will now be working to get these proposed changes passed before 1 July 2024. It is widely speculated that the Coalition will largely vote against the change. Likely, the proposed changes will still go through given the previous verbal support for scrapping the stage 3 tax cuts from the Greens and some independent senators.