PSI Income: Why the ATO Taxes You, Not Your Company
The Redesigned Stage 3 Personal Income Tax Cuts- Broken Promise or Economic Necessity?
January 28, 2024 |
Federal Government Proposes Realigning and Redistributing Personal Income Tax Cuts Set for 1 July 2024
The much debated and controversial Stage 3 tax cuts, which were initially perceived as too good to be true in the current economic climate, are now undergoing significant changes. Following intense debate, accusations of broken election promises, and widespread speculation, the Government has made a decisive move. They have announced amendments to the legislated tax cuts set to begin on 1 July 2024. This revision aims to ensure a broader spectrum of Australian taxpayers benefit from personal income tax reductions. Starting from 1 July, many will see an increase in their take-home pay. However, for some individuals, the revised tax plan might not be as beneficial as the original proposal.
To put the revised Stage 3 tax cuts into effect by 1 July 2024, the Government must act swiftly to pass new laws. This means they will need to gain backing from independent members or smaller political parties to ensure these changes are approved by Parliament.
What’s New in Stage 3 tax cuts?
The revised tax cuts are designed to redistribute benefits, aiming to aid lower-income households that have been disproportionately affected by rising living costs. If you are unfamiliar with the previous tax cut details, we invite you to read our earlier article “Are We Paying Less Tax from July 2024” for more information.
Under the proposed redesign –
- A new tax bracket has been introduced – 16%
- The threshold for paying the 2% Medicare Levy is expected to increase, with individuals starting to pay only when their income reaches $32,500, up from the previous $26,000.
What’s Changing?
With the proposed redesign of the Stage 3 tax plan information, we’ve developed practical examples to illustrate the impact on Australian taxpayers with varying incomes. This comparison will provide a clearer understanding of how the changes in tax cuts and adjustments to the Medicare Levy threshold will affect individuals differently. From those earning $40,000 to those with incomes of $200,000, we’ll explore the real-world implications of the new tax landscape set to take effect.
Scenario Overview:
We have three individuals with different annual taxable incomes: $40,000, $100,000, and $200,000. We will compare the tax cuts they would receive under the new plan versus the current Stage 3 plan. Additionally, we’ll consider the impact of the raised threshold for the Medicare Levy for low-income earners.
Individual Examples:
- Individual with a Taxable Income of $40,000:
- Under Current Stage 3 Plan: This individual would not receive any tax cut.
- Under Proposed Redesign: They would receive a tax cut of $654.
- Individual with a Taxable Income of $100,000:
- Under Current Stage 3 Plan: They would receive a tax cut of $1,375.
- Under Proposed Redesign: They would receive a larger tax cut of $2,179, which is $804 more than under the current plan.
- Individual with a Taxable Income of $200,000:
- Under Current Stage 3 Plan: They were expected to receive a tax cut of $9,075.
- Under Proposed Redesign: Their tax cut is reduced to about half, around $4,529. While this is still a benefit compared to current tax rates, it’s significantly less than initially expected.
Additional Impacts:
- Medicare Levy for Low-Income Earners:
- Before Redesign: Individuals started paying the 2% Medicare Levy when their income exceeded $26,000.
- After Redesign: The threshold is raised to $32,500, aligning with inflation, which means more low-income earners might be exempt from this levy.
Budget Considerations:
- While the proposed redesign aims to be broadly revenue neutral compared with the existing budgeted Stage 3 plan, it will incur an additional cost of around $1 billion over the next four years. However, the impact of ‘bracket creep’ is expected to reduce these gains over time.
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 |
How did we get here?
First announced in the 2018-19 Federal Budget, the personal income tax plan was designed to address the very real issue of ‘bracket creep’ – tax rates not keeping pace with growth in wages and increasing the tax paid by individuals over time. The three-point plan sought to restructure the personal income tax rates by simplifying the tax thresholds and rates, reducing the tax burden on many individuals and bringing Australia into line with some of our neighbours (i.e., New Zealand’s top marginal tax rate is 39% applying to incomes above $180,000).
The three-point plan introduced incremental changes from 1 July 2018, 1 July 2020, with stage 3 legislated to take effect from 1 July 2024.
The three stages of reform
| Tax rate | Stage 1 | Stage 2 | Stage 3 legislated | Stage 3 redesigned |
| 0% | $0 – $18,200 | $0 – $18,200 | $0 – $18,200 | $0 – $18,200 |
| 16% | $18,201 – $45,000 | |||
| 19% | $18,201 – $37,000 | $18,201 – $45,000 | $18,201 – $45,000 | |
| 30% | $45,001 – $200,000 | $45,001 – $135,000 | ||
| 32.5% | $37,001 – $90,000 | $45,001 – $120,000 | ||
| 37% | $90,001 – $180,000 | $120,001 – $180,000 | $135,001 – $190,000 | |
| 45% | $180,001 and over | $180,001 and over | $200,001 | $190,001 |
In conclusion, the redesigned Stage 3 tax cuts represent a significant shift in Australia’s taxation landscape, reflecting both the economic challenges and the evolving needs of a diverse population. These changes are poised to have far-reaching effects on individual taxpayers and the broader economy. Understanding these implications and how they directly impact you or your business is crucial.
Whether you are trying to navigate the new tax brackets, understand how the revised Medicare Levy affects you, or simply looking for the most advantageous way to manage your taxes under this new regime, expert guidance can make a substantial difference.
At Investax Group, our team of seasoned tax professionals is well-versed in the nuances of the latest tax laws and is committed to helping you optimise your financial situation. Don’t navigate these changes alone. If you need assistance with your income tax advice or returns, or if you have any questions about how the new tax laws might affect you, we encourage you to reach out to us.
New personal tax rates and thresholds for 2024–25
| Thresholds in 2023–24 ($) | Rates in 2023–24 (%) | New thresholds in 2024–25 ($) | New rates in 2024–25 (%) |
| 0 – 18,200 | Tax free | 0 – 18,200 | Tax free |
| 18,201 – 45,000 | 19 | 18,201 – 45,000 | 16 |
| 45,001 – 120,000 | 32.5 | 45,001 – 135,000 | 30 |
| 120,001 – 180,000 | 37 | 135,001 – 190,000 | 37 |
| >180,000 | 45 | >190,000 | 45 |
Distributional tables
Table 1: Change in household tax paid – single person household
| Taxable Income | Tax Liability in 2023-24 | Tax Liability Under New Cuts | Tax Cut |
| 30,000 | 1,942 | 1,588 | 354 |
| 35,000 | 3,192 | 2,688 | 504 |
| 40,000 | 4,367 | 3,713 | 654 |
| 45,000 | 5,667 | 4,863 | 804 |
| 50,000 | 7,467 | 6,538 | 929 |
| 55,000 | 9,267 | 8,213 | 1,054 |
| 60,000 | 11,067 | 9,888 | 1,179 |
| 65,000 | 12,867 | 11,563 | 1,304 |
| 70,000 | 14,617 | 13,188 | 1,429 |
| 75,000 | 16,342 | 14,788 | 1,554 |
| 80,000 | 18,067 | 16,388 | 1,679 |
| 85,000 | 19,792 | 17,988 | 1,804 |
| 90,000 | 21,517 | 19,588 | 1,929 |
| 95,000 | 23,242 | 21,188 | 2,054 |
| 100,000 | 24,967 | 22,788 | 2,179 |
| 110,000 | 28,417 | 25,988 | 2,429 |
| 120,000 | 31,867 | 29,188 | 2,679 |
| 125,000 | 33,817 | 30,788 | 3,029 |
| 130,000 | 35,767 | 32,388 | 3,379 |
| 140,000 | 39,667 | 35,938 | 3,729 |
| 150,000 | 43,567 | 39,838 | 3,729 |
| 160,000 | 47,467 | 43,738 | 3,729 |
| 170,000 | 51,367 | 47,638 | 3,729 |
| 180,000 | 55,267 | 51,538 | 3,729 |
| 190,000 | 59,967 | 55,438 | 4,529 |
| 200,000 | 64,667 | 60,138 | 4,529 |
** 1.2 million taxpayers will benefit from the 7.1 per cent increase in Medicare levy low-income thresholds for the 2023–24 income year. This increase will apply to singles, families and seniors and pensioners.
Table 2: Change in household tax paid – dual income couple with an equal income split
| Taxable Income – Spouse1 | Taxable Income – Spouse2 | Household Taxable Income | Tax Liability 2023-24 | Tax Liability Under New Cuts | Tax Cut |
| 30,000 | 30,000 | 60,000 | 3,884 | 3,176 | 708 |
| 35,000 | 35,000 | 70,000 | 6,384 | 5,376 | 1,008 |
| 40,000 | 40,000 | 80,000 | 8,734 | 7,426 | 1,308 |
| 45,000 | 45,000 | 90,000 | 11,334 | 9,726 | 1,608 |
| 50,000 | 50,000 | 100,000 | 14,934 | 13,076 | 1,858 |
| 55,000 | 55,000 | 110,000 | 18,534 | 16,426 | 2,108 |
| 60,000 | 60,000 | 120,000 | 22,134 | 19,776 | 2,358 |
| 65,000 | 65,000 | 130,000 | 25,734 | 23,126 | 2,608 |
| 70,000 | 70,000 | 140,000 | 29,234 | 26,376 | 2,858 |
| 75,000 | 75,000 | 150,000 | 32,684 | 29,576 | 3,108 |
| 80,000 | 80,000 | 160,000 | 36,134 | 32,776 | 3,358 |
| 85,000 | 85,000 | 170,000 | 39,584 | 35,976 | 3,608 |
| 90,000 | 90,000 | 180,000 | 43,034 | 39,176 | 3,858 |
| 95,000 | 95,000 | 190,000 | 46,484 | 42,376 | 4,108 |
| 100,000 | 100,000 | 200,000 | 49,934 | 45,576 | 4,358 |
| 110,000 | 110,000 | 220,000 | 56,834 | 51,976 | 4,858 |
| 120,000 | 120,000 | 240,000 | 63,734 | 58,376 | 5,358 |
| 130,000 | 130,000 | 260,000 | 71,534 | 64,776 | 6,758 |
| 140,000 | 140,000 | 280,000 | 79,334 | 71,876 | 7,458 |
| 150,000 | 150,000 | 300,000 | 87,134 | 79,676 | 7,458 |
| 160,000 | 160,000 | 320,000 | 94,934 | 87,476 | 7,458 |
| 170,000 | 170,000 | 340,000 | 102,734 | 95,276 | 7,458 |
| 180,000 | 180,000 | 360,000 | 110,534 | 103,076 | 7,458 |
| 190,000 | 190,000 | 380,000 | 119,934 | 110,876 | 9,058 |
| 200,000 | 200,000 | 400,000 | 129,334 | 120,276 | 9,058 |
Table 3: Change in household tax paid – dual income couple with two-thirds and one-third split
| Taxable Income – Spouse1 | Taxable Income – Spouse2 | Household Taxable Income | Tax Liability 2023-24 | Tax Liability Under New Cuts | Tax Cut |
| 40,200 | 19,800 | 60,000 | 4,419 | 3,759 | 660 |
| 46,900 | 23,100 | 70,000 | 6,582 | 5,584 | 999 |
| 53,600 | 26,400 | 80,000 | 9,661 | 8,396 | 1,265 |
| 60,300 | 29,700 | 90,000 | 13,030 | 11,499 | 1,532 |
| 67,000 | 33,000 | 100,000 | 16,354 | 14,556 | 1,798 |
| 73,700 | 36,300 | 110,000 | 19,359 | 17,294 | 2,065 |
| 80,400 | 39,600 | 120,000 | 22,468 | 20,137 | 2,331 |
| 87,100 | 42,900 | 130,000 | 25,638 | 23,040 | 2,598 |
| 93,800 | 46,200 | 140,000 | 28,927 | 26,069 | 2,858 |
| 100,500 | 49,500 | 150,000 | 32,427 | 29,319 | 3,108 |
| 107,200 | 52,800 | 160,000 | 35,926 | 32,568 | 3,358 |
| 113,900 | 56,100 | 170,000 | 39,426 | 35,818 | 3,608 |
| 120,600 | 59,400 | 180,000 | 42,952 | 39,067 | 3,885 |
| 134,000 | 66,000 | 200,000 | 50,554 | 45,566 | 4,988 |
| 147,400 | 72,600 | 220,000 | 58,067 | 52,844 | 5,223 |
| 160,800 | 79,200 | 240,000 | 65,570 | 60,182 | 5,388 |
| 174,200 | 85,800 | 260,000 | 73,073 | 67,520 | 5,553 |
| 187,600 | 92,400 | 280,000 | 81,184 | 74,858 | 6,326 |
| 200,000 | 100,000 | 300,000 | 89,634 | 82,926 | 6,708 |
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