Anthony Albanese will make changes to stage three tax cuts to help ‘middle Australia’

The Prime Minister has confirmed a significant shake-up to Australia’s taxation system, set to get high-income earners off-side.

Anthony Albanese will use a major address to justify unravelling legislated stage three tax cuts in order to help “middle Australia”, arguing that policy must pivot to address the cost of living crunch.

Despite guaranteeing dozens of times during the 2022 election, and in the 19 months since, that Labor’s position on stage three tax cuts “had not changed”, the Prime Minister has backflipped and set himself up for a bruising political fight.

The Coalition – which legislated the tax cuts in 2019 while in government with the support of Labor – has already used days of speculation and media reports to accuse Mr Albanese of breaking a promise, and say they will restore the tax cuts to their original form should they win the next election.

But at the National Press Club on Thursday, Mr Albanese will justify his decision to help low-and middle- income earners at the expense of wealthier Australians, selling it as a “tax cut for everyone” which will benefit all taxpayers.

“This is a plan for middle Australia that delivers for every Australian taxpayer, right up and down the income ladder,” he will say.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers will now need to prepare for a political fight. Picture: NCA NewsWire / Martin Ollman

Bracing himself for further pressure over Labor’s decision, Mr Albanese will justify the significant overhaul by saying “when economic circumstances change, the right things to do is change your policy. That’s what we are doing”.

Last year, Mr Albanese and Treasurer Jim Chalmers commissioned senior Treasury and Finance officials to canvas options for providing cost-of-living relief for Australians.

In his speech, Mr Albanese will quote that advice, which outlines that the positive economic outlook forecast from almost five years ago “have not come to pass”.

“This is the right decision, for the right reasons and we’ve made it the right way,” he will say.

“It’s the best way forward, because it’s the best way to help Australians struggling with their cost of living without putting pressure on inflation.”

Under the changes rubber stamped by caucus on Wednesday, the Albanese government’s tax cuts will lower the tax rate on incomes up to $45,000 to 16 per cent – down from 19 per cent – and lower the $45,000 to $135,000 tax bracket to 30 per cent – down from 32.5 per cent.

Additionally, the 37 per cent tax bracket will be retained between $135,000 and $190,000, above which the top marginal tax rate will then kick in at a 45 per cent rate.

The changes will neuter the third stage of the Morrison government’s tax package – designed to address bracket creep – which would have abolished the 37 per cent tax bracket on income earnt between $120,000 and $180,000.

Instead, a 30 per cent tax rate would have applied to all earnings between $45,000 and $200,000, with a 45 per cent rate on all earnings above this level.

As a result of Labor’s tax package, roughly one million taxpayers who earn in excess of $150,000 a year will be up to $4546 worse off than they otherwise would have been.

However, the overwhelming majority of taxpayers are set to be better off with all income earners between $45,000 and $135,000 receiving an extra $840 under the Albanese government’s policy.

Ahead of the announcement, shadow treasurer Angus Taylor said the opposition would “look closely” at Mr Albanese’s speech, but said the parties position on stage three tax cuts was “unambiguous”.

“The position that’s changed is Labor’s. They committed, the Prime Minister and Treasurer, over 100 times to the stage three tax. They’ve been locked in for years, they’re in legislation,” he said on Wednesday afternoon.

The Business Council’s chief executive Bran Black joined the opposition’s attacks on the policy backflip, arguing public confidence in the government had been undermined when the changes had been voted into law and given an iron-clad guarantee, only to be changed.

“This decision to overturn an iron clad guarantee significantly sets back our capacity to deliver the wholesale tax reform that’s so urgently needed,” Mr Black said.

Mr Albanese says his changes are for the good of ‘middle Australia’. Picture: NCA NewsWire / Martin Ollman

Mr Albanese said the tax cuts would be a “significant boost for the take home pay of Australians on modest incomes, and people working part-time”.

“Our government understands that middle income Australians need help with cost of living now, more than ever,” he will say.

Mr Albanese will say hardworking Australians earning less than $45,000 would have received nothing under the original plan, whereas his tax cuts would assist those most in need.

While opponents of the stage three changes cited the excessive cost of implementing them, the updated tax package will cost even more than the original package’s $300bn, 10-year price tag.

The changes will mean an additional $6bn in foregone revenue over the four-year forward estimates period, however this cost will fall to $1bn over the next decade due to bracket creep, according to Parliamentary Budget Office calculations.

The government will also announce an increase to the low income threshold at which the Medicare levy applies, meaning 1.2 million low-income earners will either remain exempt from paying the levy, or will pay less in tax.