Unless you have been hiding somewhere, you will have seen and heard a lot about the changes to the ‘stage 3 tax cuts’ that the Commonwealth recently announced.
Way back before the pandemic, when Scott Morrison was Treasurer and Malcolm Turnbull the PM, the Commonwealth Government introduced a series of tax cuts divided into three stages – stage 1, stage 2 and stage 3. Stage 1 took effect on 1 July 2018. Stage 2 took effect on 1 July 2019. And Stage 3 was due to take effect on 1 July 2024.
Under the initial proposal for stage 3, as of the 1 July this year, Australia was going to move from the current five to just four tax brackets. What’s more, one bracket was likely to ‘catch’ a large majority of income earners. The proposed new tax brackets were as follows:
| Tax Rate | Taxable income |
|---|---|
| Nil or Tax Free | $0 – $18,200 |
| 19% | $18,201 – $45,000 |
| 30% | $45,001 – $200,000 |
| 45% | $200,000+ |
These brackets are the same as the current brackets for the first $45,000. Above $45,000, there are some significant changes. Currently, income over $45,000 is taxed at 32.5% up to the level of $120,000, and then 37% between $120,001 and $180,000. Anything over $180,000 is taxed at 45%.
The proposed new brackets simplified this and reduced the amount of tax that anyone earning over $45,000 would pay. Both the 32% and the 37% rates were to fall to 30%. However, the savings were skewed towards people with higher incomes, with people earning less than $45,000 getting no additional benefit at all.
It is very unusual for a tax change to be proposed in 2018 to take effect from 2024. As we know all too well, a lot can happen in such a long period of time – we had a change of PM, a pandemic, a change of entire Government and a burst of inflation, to name just four. Even more amazingly, Melbourne won an AFL premiership and Penrith won three NRL premierships… in a row! Six years is a long time.
Because of this, there has been speculation since the Commonwealth Government changed in 2022 that there would be changes to the stage 3 cuts. Those changes were confirmed last month. The Commonwealth Government has proposed an alternative set of new tax brackets, as follows:
| Tax Rate | Taxable income |
|---|---|
| Nil or Tax Free | $0 – $18,200 |
| 16% | $18,201 – $45,000 |
| 30% | $45,001 – $135,000 |
| 37% | $135,001 to 190,000 |
| 45% | $190,000+ |
These changes mean that anyone with income over $18,200 will pay less tax than they do at present, because the lowest rate of tax will fall from 19% to 16%. The tax payable for people earning between $45,001 and $135,000 will be the same as under the previous proposal. People earning more than $135,000 pay more under the new changes than they would have under the old one.
By keeping five tax brackets, the changes also preserve more of what is known as Australia’s ‘progressive tax system.’ Progressive taxation is a system where people with higher incomes pay a larger percentage of their income in taxes compared to those on lower incomes. This means that as income increases, the percentage of taxes paid also increases. The idea behind progressive taxation is to distribute the tax burden more equitably, ensuring that those who can afford to contribute more do so, while providing comparative relief for lower-income earners. The Morrison changes moved Australia more towards a flat tax system. This was arguably the most radical element of the changes.
To see how the differences might affect you, here are some comparative amounts of the amount of tax saved under each of the original and the changed Stage 3 cuts:
| Taxable Income | Original Stage 3 Tax Saved | New Stage 3 Tax Saved |
|---|---|---|
| $20,000 | $0 | $54 |
| $40,000 | $0 | $654 |
| $60,000 | $375 | $1,179 |
| $80,000 | $875 | $1,679 |
| $100,000 | $1,375 | $2,179 |
| $120,000 | $1,875 | $2,679 |
| $140,000 | $3,275 | $3,729 |
| $160,000 | $4,675 | $3,729 |
| $180,000 | $6,075 | $3,729 |
| $200,000 | $9,075 | $4,529 |
Obviously, when one Government changes something another Government introduced, there will be a lot of political debate. We do not want to enter into anything of that nature, other than to observe that the inflation and high interest rates of the last two years made a tax cut that favoured higher earners (as the original changes did) unpalatable to many. Channel 9 have reported that around two-thirds of voters are in favour of the changes to stage 3. That’s probably about the same number of people who are better off under the changes!