The Federal Government has recently announced a realignment of the personal income tax cuts, initially legislated to commence on 1 July 2024. This realignment is part of a new proposal that seeks to redistribute the tax cuts more effectively.
Overview of the Amended Tax Cuts
In response to ongoing speculation, the Government has confirmed amendments to the Stage 3 tax cuts scheduled for 1 July 2024. The objective is to extend the benefits of personal income tax reductions to a broader segment of Australian taxpayers. Consequently, a more significant proportion of the population will observe an increase in their net salary from 1 July. However, it is essential to note that the degree of benefit will vary, with some individuals receiving less favourable outcomes compared to the original plan.
Key Changes to the Tax Structure
The primary focus of the revised tax cuts is to support lower-income households, which have been disproportionately affected by the rising cost of living. The proposed changes are as follows:
1. Taxpayers earning below $146,486 and with a taxable income liability will receive a more substantial tax cut than under the previous Stage 3 framework. For instance:
- An individual with a taxable income of $40,000 will benefit from a $654 tax reduction, in contrast to no reduction under the original Stage 3 plan. It should be noted that they may have already benefited from Stage 1 and 2 tax cuts.
- For those earning $100,000, the tax cut will increase to $2,179, representing an additional $804 compared to the original Stage 3 plan.
2. However, individuals with an annual income of $200,000 will see their tax cut reduced to approximately half of the initially expected amount, from $9,075 to $4,529. While this still represents a tax reduction relative to the current rates, the benefit is diminished.
Furthermore, the Government plans to increase the Medicare Levy low-income thresholds by 7.1%, aligning with inflation rates. This adjustment means that individuals will not begin paying the 2% Medicare Levy until their income surpasses $32,500, an increase from the former threshold of $26,000.
Despite aiming to maintain revenue neutrality compared to the initially budgeted Stage 3 plan, the revised proposal is projected to incur an additional cost of approximately $1 billion over the next four years. However, the effect of bracket creep is expected to gradually reduce these additional expenditures.
The current, legislated, and redesigned Stage 3 tax rates for Australian resident taxpayers
| 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 |
Legislative Process and Implementation
The enactment of these redesigned tax cuts is contingent upon the Government’s ability to swiftly pass amending legislation before 1 July 2024. This process will require securing support from independents or minor parties to ensure the successful passage through Parliament.
Contextual Background
The original personal income tax plan, announced in the 2018-19 Federal Budget, was developed to address the issue of bracket creep, where tax rates do not keep pace with wage growth, leading to a gradual increase in tax burdens over time. The plan, comprising three stages, was designed to restructure personal income tax rates, simplify tax thresholds, and reduce the overall tax burden. This approach intended to align Australia’s tax system more closely with other nations, like New Zealand, which has a top marginal tax rate of 39% for incomes exceeding $180,000. The incremental changes commenced on 1 July 2018 and were set to culminate with Stage 3 in July 2024. The latest government proposal represents a significant modification to this plan.