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Proposed changes to stage 3 tax cuts announced

With the government finally caving into pressure to change the stage 3 income tax cuts despite its previous promises to keep the already legislated measures, new proposed tax rates have been flagged to come into place from 1 July 2024, largely – in comparison to the legislated measures – benefiting those earning less than $45,000. The government will now be starting a campaign to win Parliamentary support for these proposed changes to ensure amending legislation is introduced and passed before 1 July 2024 (when the original stage 3 changes were due to apply).

The proposed changes to the 2024/25 individual tax rates are:

Tax Rate 2023-24 2024-25 Legislated 2024-25 Proposed
0% $0 - $18,200 $0 - $18,200 $0 - $18,200
16%     $18,201 - $45,000
19% $18,201 - $45,000 $18,201 - $45,000  
30%   $45,001 - $200,000 $45,001 - $135,000
32.5% $45,001 - $120,000    
37% $120,001 - $180,000   $135,001 - $190,000
45% >$180,000 >$200,000 >$190,000

The talk about the stage 3 income tax cuts has reached fever pitch in recent weeks. The changes were originally legislated by the previous Coalition government in 2019 with support of the then Labor opposition. During the 2022 election campaign and since coming into government, Prime Minister Anthony Albanese 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 favour of cost-of-living relief for low to middle income earners, which would require the introduction of amending legislation. 

As a refresher, the original stage 3 tax cuts are due to come in place from 1 July 2024, and would benefit individuals that earn above $45,000 of taxable income. 
Under the current (pre-stage 3) rates, individuals that 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 excess over $45,000;
  • $120,001 and $180,000 are taxed at $29,467 plus 37% of excess over $120,000; and
  • $180,001 and more are taxed at $51,667 plus 45% of excess over $180,000.

From 1 July 2024, however, under the already legislated stage 3 tax measures, those earning taxable income between $45,000 and $200,000 will be taxed at $5,092 plus 30% of excess over $45,000. In addition, individuals who earn $200,001 and more will taxed at $51,592 plus 45% of 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 a worker on this median wage would be paying $17,507 in tax, and under the already legislated stage 3 rates for the 2024–2025 income year the same worker would be paying $16,552 (a tax saving of $955). 

Of course, as critics of the legislated tax cuts have pointed out, those who earn 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. Under the current tax rates a worker on this wage would be paying around $39,323 in tax, and under the already legislated stage 3 tax rates the same worker would 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. As currently legislated these individuals would experience a tax saving of a whopping $9,075 ($60,667 in tax under the current rates versus $51,592 in 2024–2025 under the stage 3 tax cuts). 

New proposals

Under the government’s most recent proposed changes, those earning between $18,201 and $45,000 would see their tax rate reduced from 19% to 16%. In addition, those who earn between $45,001 and $135,000 would be taxed at the new marginal tax rate of 30%, and the existing 37% marginal rate would be retained but would apply to individuals earning between $135,001 and $190,000. The top marginal rate of 45% would 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), and those in the 90th percentile of earners would be slightly worse off under the proposed changes ($35,594 in tax) compared to stage 3 ($35,584 in tax), but would still be better off than under the current system ($39,323 in tax). 

The government will now be working to get the proposed changes passed before 1 July 2024. It is widely speculated that the Coalition will largely vote against the change; however, it is likely that 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. 

Medicare levy low-income threshold 2023–2024

The Prime Minister also flagged in his press release that the government will increase the Medicare levy low-income thresholds for 2023–2024. There are no details provided as to numbers, so it is not yet known whether the increase would be CPI-related (which is the standard approach), or perhaps be greater (as part of the “relief” plan).

Source: The Hon Anthony Albanese MP - Tax cuts to help with the cost of living 
Treasury - Tax cuts to help with the cost of living 
Treasury - Advice on amending tax cuts to deliver broader cost-of-living relief