Stage 3 tax cuts have been a topic of discussion since they were announced in 2018. These tax cuts were aimed to provide Australian taxpayers with some relief from “bracket creep”, while making the tax system a bit simpler.
What are the stage 3 tax cuts?
In simple terms, the previous Australian government tinkered with the details about how much income tax you pay based on your income. Stage three tax cuts will mainly affect people who make larger salaries – and they will pay less tax.
In this third and final stage of the three-part plan introduced by the Australian government, tax rates are lowered for middle and high-income earners. The latest tax cuts include changes to the income ranges and tax rates in the marginal tax brackets. Changes to the tax brackets already occurred in the 2018-19 and 2019-20 financial years, with more changes due 1 July 2024.
Who can get the tax cuts?
Previous years’ tax cuts created a benefit to low-middle income earners whose income is over $37,000. The next set of tax cuts have mostly affected high-income taxpayers earning between $120,001 and $200,000. As the ABC illustrates so well, this is effectively a $189 billion tax cut for people earning more than $120,000, which equals almost 80% of the tax cuts on offer.
By removing the 32.5% and 37% tax brackets and increasing the minimum income level for those who sit in the 45% tax bracket, those earning $45,000-$200,000 will sit in the newly created middle tax rate of 30%.
These changes were designed to simplify the Australian tax system and combat tax bracket creep by reducing the number of tax brackets, leaving the four below:
2024-25 Tax Brackets
| Tax Rate | Taxable income |
|---|---|
| Nil or Tax Free | $0 – $18,200 |
| 19% | $18,201 – $45,000 |
| 30% | $45,001 – $200,000 |
| 45% | $200,000+ |
How much are the tax cuts?
Stage 3 tax cuts will see all taxpayers see a reduction in their tax rates. Those earning between $45,001 and $120,000 will see a reduction of 2.5 points in their income tax rate, while on the other end of the scale, high income earners will benefit the most with a difference of up to 15 points.
When do stage 3 tax cuts come into effect?
Many Australians are already reaping the benefits of previous years’ tax cuts, and luckily, we don’t have to wait much longer for more cuts. With the LMITO ending on 30 June 2022, many workers will be relieved to hear that these latest tax cuts are set to come into effect from July 1, 2024.
How do the stage 3 tax cuts affect your tax?
The tax cuts coming in 2024-25 will have a significant impact on your tax, especially if you are in the middle or upper-income bracket. You should see a reduction in the amount of tax you pay, which will increase your annual take-home pay.
Table: Actual Take Home Pay After Tax
| Basic Salary Before Tax | 2019-20 | 2021-22 | 2024-25 |
|---|---|---|---|
| $45,000 | $38,828 | $39,908 | $39,908 |
| $70,000 | $55,703 | $56,783 | $57,408 |
| $120,000 | $88,103 | $90,533 | $92,408 |
| $180,000 | $125,903 | $128,333 | $134,408 |
| $200,000 | $136,903 | $139,333 | $148,408 |
If you are in a lower income bracket, the tax cuts for you were already provided in 2019-20 and the government is not planning any new tax cuts for low or low-middle income earners.
Do you need to do anything to get these tax cuts on your return?
No, if the marginal tax rate for your income has been reduced as a result of these tax cuts, the new tax rate will automatically be applied both by your employer, and on your tax return.
If you have any questions about the tax cuts or anything else regarding your tax return, please get in touch.
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