Stage 3 tax cuts: What they mean for you

Under the proposed stage three tax cuts, many Aussies could be set to have more money in their wallet. See what the tax cuts mean and how they could help you.

Many Australians are due to receive a tax cut from July 1 provided Labor does not move to change the controversial stage 3 plan legislated five years ago.

Under the changes everyone earning between $45,000 and $200,000 would pay no more than 30 cents in the dollar in tax, but some advocates say the proposal is unfair for lower income earners.

WHERE DID THE PLAN COME FROM?

The former Morrison government developed a three stage tax cut plan in 2019, which was legislated by the then-Coalition majority parliament.

WHAT’S LABOR’S POSITION?

After initially opposing the third stage of the tax cuts and seeking to have the Coalition’s bill split to vote on the controversial change separately, Labor ultimately went to the 2022 election supporting the Stage 3 in full.

Since taking office in May 2022, Anthony Albanese and his senior ministers have repeatedly stated “our position hasn’t changed” on the cuts.

However backbench Labor MPs have continued to advocate for the package to be altered to help lower income households more, and the Prime Minister has recently pivoted to saying “everyone will be getting a tax cut” rather than committing to the current stage 3 plan in full.

Many Australians are due to receive a tax cut from July 1 provided Labor does not move to change the controversial stage 3 plan legislated five years ago.

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 THAT 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.

A worker on $50,000 would save about $125.

Stage 3 tax cuts could mean a saving of up to $9000, depending on how much you earn. Picture: iStock

WHY WAS THE THREE STAGE PLAN DEVELOPED?

In 2019 the Coalition Government was looking to stimulate the economy through tax cuts and address “bracket creep”.

WHAT IS BRACKET CREEP?

This is where a pay rise leads to a person paying a bigger per cent of their income in tax as workers “creep” up the tax brackets.

Because tax brackets are not automatically adjusted for inflation, this means over time as an individual’s pay goes up their average tax rate increases because more of their pay is in their highest bracket.

ARE STAGE 3 TAX CUTS INFLATIONARY?

Economists are divided on the inflationary impact of the cuts, with many pointing to the fact the budget and Reserve Bank of Australia has already factored in the changes into forecasts that show inflation eventually returning to within the target range of two to three per cent.

Recently modelling produced by JP Morgan based on household consumption habits estimated about $13 billion of the tax cut’s $20 billion annual cost in 2024-25 would be spent, while the remainder would be saved.

This would be spending of about 0.5 per cent of GDP, which has been deemed to have a “negligible” impact on inflation.

But critics of stage 3 say the increase in money in the economy will ensure inflation remains higher for longer, ultimately hurting struggling households and mortgage holders more than helping.

STAGE 3 TAX CUTS: PROS AND CONS

Supporters of the tax cuts say the changes address bracket creep, resetting the situation where Australians today are paying a higher average tax rate than two decades ago when the brackets were last adjusted.

Stage 3 advocates also say the changes stimulate the economy by incentivising people to work more and therefor earn more as there is less disincentive that extra income will be disproportionately taken as tax.

People who oppose Stage 3 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.

Stage 3 alone is estimated to cost the government $323.6 billion over the next decade, according to modelling produced by the Parliamentary Budget Office.

Some advocates and MPs say this money would be better spent on more targeted relief for low and middle income Australians.

Originally published as Stage 3 tax cuts: What they mean for you