Revised Stage 3 Tax Cuts Explained

The government has restructured the stage three tax cuts, revising the initial tax cuts package implemented several years ago by the former Liberal government.

The original package, which heavily favored those with the highest incomes, was considered challenging to justify in the current economic climate. Recognising the disproportionate impact of the cost of living on low and middle-income taxpayers, the adjustment is now viewed as a way to provide additional financial relief to hardworking families, addressing expenses such as mortgages, food, and fuel bills.

As for the current income tax system, the first $18,200 of annual earnings remains non-taxable (referred to as the tax-free threshold). Subsequently, there are four tax brackets: individuals are subject to a 19% tax rate on earnings between $18,201 and $45,000, a 32.5% rate for earnings between $45,001 and $120,000, a 37% rate for earnings between $120,001 and $180,000, and a 45% rate for every dollar earned beyond that threshold.

What were the Stage Three Tax Cuts?

Commencing on July 1, 2024, the Stage Three Tax Cuts aimed to eliminate the 37% marginal tax rate for individuals earning over $120,000 annually. Simultaneously, the 32.5% tax rate was slated to decrease to 30% for those with incomes falling between $45,000 and $200,000. Essentially, this would have established a unified 30% tax bracket for individuals earning between $45,000 and $200,000. For earnings exceeding $200,000, the existing 45% tax rate was set to be maintained.

However, in their original configuration, these tax cuts disproportionately favored high-income earners. Consequently, individuals earning $45,000 saw no change, those with an $80,000 income received a mere $875 benefit, while individuals earning $200,000 experienced a substantial windfall of $9,075.

Proposed Changes Unveiled by Prime Minister Anthony Albanese

In a recent address to the National Press Club, Prime Minister Anthony Albanese outlined the key features of the new Stage 3 tax cuts. The proposed changes include:

– Reducing the 19% tax rate to 16%, resulting in a $804 saving for individuals with taxable incomes of $45,000.

– Lowering the 32.5% tax rate to 30% for incomes ranging from $45,000 to $135,000.

– Maintaining the 37% tax rate but elevating the threshold for its application to $135,000.

– Preserving the current 45% tax rate while adjusting the threshold to $190,000 (a $10,000 reduction from the original design).

The redesigned package aims to moderate the benefits for higher-income earners, such as those earning $200,000, who will now experience a reduced benefit of $4,546 compared to the initially proposed $9,075. Note: All figures and details in the redesigned package are subject to legislative approval.

Furthermore, the Prime Minister announced an adjustment to the Medicare low-income threshold. Currently set at $24,276 or less, individuals within this income bracket are exempt from the 2% Medicare levy on their taxable income. Beyond this threshold, the levy gradually increases, with the full 2% applied to those earning more than $30,345. The revised thresholds are now $26,000 and $32,500, reflecting a 7.1% increase in alignment with inflation.

Despite maintaining the overall cost of the tax cuts package, this modification ensures a more widespread distribution of tax savings. The focus has shifted towards low and middle-income taxpayers who, in the initial tax cuts, were not as well catered to. Given the challenges posed by increases in the cost of living, this adjustment acknowledges the larger demographic of low and middle-income earners, who significantly outnumber high-income earners (with less than 5% earning above $180,000).