Promised stage three tax cuts explained: Who possible changes to plan could affect most

If you’re confused about the stage three tax cuts, you’re not alone. Here’s your two-minute guide to what they mean for you and how they might change.

Talk the Anthony Albanese Labor government is considering making key changes to stage three tax cuts — designed to reduce tax for Australia’s middle and higher income earners, and promised years’ ago — has hardworking Victorian families feeling nervous.

So who would come out the winners and losers in any changes to the original tax cuts plan?

What are the stage three tax cuts?

The tax changes will abolish the 37 per cent bracket on income earned between $120,000 and $180,000 from July 1, 2024.

The stage three tax cuts were legislated by the Scott Morrison Liberal federal government in 2019 and endorsed by the Albanese government. Labor went to the 2022 election backing the cuts, which would effectively mean the vast majority of Australians would pay no more than 30 cents in the dollar in income tax.

A person earning $90,000 a year would save about $1,125, a worker on $150,000 would save $3,975, and someone on $200,000 would save $9,075. A worker on $50,000 would save about $125.

What is feared could now change?

According to reports on Monday, federal cabinet will consider altering the tax package to:

- Raise the tax-free threshold, which is currently at $18,200.

- Apply the 45 per cent tax rate to anyone earning $180,000 per year. The 45 per cent rate currently kicks in at a wage of $200,000.

Why is there speculation the original plan could change?

A cost of living crisis meeting for all Labor MPs in Canberra set for Wednesday has fuelled speculation the government could alter the tax package to provide more help to low and middle income Australians at the expense of higher earners.

Who would win and who would lose from stage 3 as orginally planned?

People who oppose stage three say the cuts will have an inflationary impact on the economy as people will have more money to spend, which would then further drive up living costs.

Other opponents also argue the cuts unfairly favour higher income earners, with people on $200,000 paying the same tax rate as someone on $45,000.

Who would win and who would lose out from the speculated changes?

An overhaul would mean lower-income earners would receive greater relief, however, those earning above $180,000 would see an increase in their tax bill.

Coalition treasurer spokesman Angus Taylor has said reducing tax breaks for higher income earners would be a “betrayal”.

The average Australian full time worker earns $1600 a week — equalling an annual salary of $83,200 according to the latest data from the Australia Bureau of Statistics.

Victorians in a lower income bracket were given tax cuts in 2019-20.

People who oppose stage three say the cuts will have an inflationary impact on the economy as people will have more money to spend, which would then further drive up living costs.

Other opponents also argue the cuts unfairly favour higher income earners, with people on $200,000 paying the same tax rate as someone on $45,000.

Why would the government consider a change?

Retaining the $180,000 bracket would allow the tax free threshold to rise to roughly $19,400 without costing the budget. If the government ditched the current stage 3 proposal to raise the top tax bracket from $180,000 to $200,000, it would save about $3.6 billion a year. This saving could then instead be used to lift the tax-free threshold from the current $18,200, or spent on other support measures.

Has the Albanese government committed to changing stage 3 tax cuts?

No. When asked, the Prime Minister’s office said the government had not changed its position, however, the Treasurer’s did not rule out the possibility of changes.

Labor sources have revealed the Prime Minister has faced pressure to tinker with the original stage three tax cuts promise and he was caught out in a breakfast TV interview refusing to guarantee them.

What are the stages?

Stage one: A temporary low and middle-income offset (LMITO) worth up to $1,080 a year to taxpayers earning between $30,000 and $126,000 that expired in 2022.

Stage two: From July 1, 2020, raised the 32.5 per cent marginal tax bracket from $37,001 – $90,000, to now $45,001 – $120,000

Stage three: from July 1, 2024, abolish the 37 per cent marginal tax bracket completely and lowers the 32.5 per cent rate to 30 per cent. It also raises the threshold for the 45 per cent marginal tax rate from $180,000 to $200,000. This means everyone earning between $45,000 and $200,000 will pay the same 30 cents in the dollar tax rate.

What would tax brackets look like if stage 3 is delivered in full?

$18,200 or below – no tax

$18,201 to $45,000 – pay a 19 per cent tax

$45,001 to $200,000 – pay a 30 per cent tax rate

$200,001 or higher – pay a 45 per cent tax rate

What does it look like as a tax saving?

Compared to the current tax brackets as of the 2023-24 financial year:

A person earning $90,000 a year would save about $1,125, someone on $150,000 would save $3,975, a person earning $200,000 would save $9,075 and a worker on $50,000 would save about $125.

Originally published as Promised stage three tax cuts explained: Who possible changes to plan could affect most