Prime Minister Anthony Albanese has introduced alterations to the third stage of tax cuts—a pivotal and contentious component of Australia’s income tax adjustments—aiming to augment advantages for individuals within lower and middle-income brackets.
Since the government’s announcement in January regarding modifications to the structure of the third stage tax cuts, public attention has been fixated on the matter. Following extensive deliberations within the Coalition, the Liberal party ultimately refrained from impeding the enactment of the amended legislation. Subsequently, on February 27, the legislation received formal approval in the Senate, slated to come into effect at the onset of the upcoming fiscal year on July 1.
The stage three tax cuts have been a subject of intense scrutiny due to their significance and implications. What exactly do these tax cuts entail, why have they ignited such controversy, and what compelled the government to navigate through political challenges to amend them?
What Are the Stage Three Tax Cuts?
The Stage Three tax cuts constitute the final segment of the income tax adjustments introduced by the center-right Morrison government in 2019, supported by the then-opposition Labor party, albeit with some reservations.
Primarily aimed at addressing ‘bracket creep’, wherein rising incomes push individuals into higher tax brackets, the tax cuts proposed by the former Coalition government sought to mitigate this phenomenon. Despite no real increase in income due to inflationary pressures, individuals end up paying a higher proportion of income tax.
Outlined in three phases, the 2019 plan unfolded as follows:
Phase one entailed a temporary Low-and Middle-Income Tax Offset (LMITO), offering taxpayers earning between $30,000 and $126,000 a tax reduction of up to $1,080. This phase concluded in June 2022.
Phase two involved raising the income threshold at which the 32.5% tax rate applied, extending it from $37,001 to $90,000 to $45,001 to $120,000. This adjustment primarily benefited low and middle-income earners. Originally slated for July 2022, its implementation was accelerated to July 2020.
Phase three aimed to eliminate the 37% marginal tax bracket entirely while reducing the 32.5% marginal tax rate to 30%. Additionally, it sought to increase the threshold for the top 45% marginal tax rate from $180,000 to $200,000. Consequently, individuals earning between $45,000 and $200,000 would be subject to a uniform 30% tax rate. The implementation of this phase was scheduled for July 1, 2024.
After the completion of the previous administration’s restructuring efforts, the tax brackets were anticipated to adopt the following format:
Original Stage Three Tax Brackets
| Income Level | Tax Rate |
|---|---|
| Up to $18,200 | No tax |
| $18,201 to $45,000 | 19% |
| $45,001 to $200,000 | 30% |
| Above $200,000 | 45% |
Although the proposal smoothly passed through parliament, it faced substantial criticism from activists and tax specialists alike. The criticism stemmed from its significant expense and perceived favoritism towards higher-income earners in terms of tax reductions. These stage-three tax cuts are projected to result in a loss of approximately $243 billion in tax revenue for the government over the span of a decade.
Changes to the Stage Three Tax Cuts
Despite maintaining the overall cost of stage-three reforms, the Albanese administration has opted to recalibrate tax reductions, prioritizing low and middle-income earners over higher-income brackets.
The most notable alteration from the original scheme is the retention of the 37% tax rate, albeit with an increased upper threshold of $190,000. In exchange, adjustments have been made to lower tax brackets.
In accordance with the Labor government’s updated proposal, the tax brackets will be structured as follows:
Revised Stage Three Tax Brackets
| Income Level | Tax Rate |
|---|---|
| Up to $18,200 | No tax |
| $18,201 to $45,000 | 16% |
| $45,001 to $135,000 | 30% |
| $135,001 to $190,000 | 37% |
| Above $190,000 | 45% |
The decision has sparked controversy and poses political risks for the government, particularly considering Labor’s prior commitment to maintain the legislated tax adjustments unchanged leading up to the 2022 election and subsequent reaffirmations.
Nevertheless, Albanese defended the policy reversal, citing the altered economic landscape facing many Australians as of early 2024, asserting that the revisions will alleviate the financial strain on low and middle-income households.
Australia’s inflation rate moderated to 4.1% in the December quarter following a peak of approximately 8% in 2022. Recent monthly CPI figures indicate a 3.4% increase for the year ending January, according to the latest ABS data, aligning with the RBA’s target band of 2% to 3%.
The government argued that the initial tax cut plan was devised five years prior, preceding the pandemic and the subsequent global inflation surge and interest rate adjustments, which have introduced economic uncertainties and raised concerns about a potential recession.
Albanese stated, “When economic circumstances evolve, it’s imperative to adjust economic policies accordingly. That’s precisely what we’re doing. We’ve identified a more prudent approach to ensure broader tax relief for individuals grappling with financial pressures.”
He further noted that a surplus in the previous fiscal year facilitated the implementation of these changes.
What will they mean for you from July 1?
Presently, Australians are subjected to a tiered income tax system with the following structure:
Current Australian Tax Brackets
| Income Level | Tax Rate |
|---|---|
| Up to $18,200 | No tax |
| $18,201 to $45,000 | 19% |
| $45,001 to $120,000 | 32.5% |
| $120,001 to $180,000 | 37% |
| Above $180,000 | 45% |
In its revised proposal, the government intends to reduce the 32.5% tax rate to 30%, while extending the 37% tax rate to encompass a broader income spectrum. The government asserts that all taxpayers will experience a reduction in taxes, with the greatest benefits accruing to lower and middle-income earners.
In essence, this implies that individuals earning less than $150,000 annually will enjoy more substantial tax reductions compared to what was outlined in the original stage three plan. Conversely, those earning above $150,000 will see diminished tax cuts compared to earlier projections.
For instance, an individual earning the average Australian salary of approximately $80,000 per annum will now receive a tax cut of $1679, a notable increase from the $875 reduction initially anticipated under the original plan. Conversely, someone earning $200,000 annually will witness a tax cut of $4529, down from the $9075 envisaged in the original proposal.
Tax Cut Comparison (excluding Medicare Levy)
| Taxable Income | Tax Cut under Original Stage 3 | Tax Cut under Revised Stage 3 | Difference |
|---|---|---|---|
| $20,000 | $0 | $0 | $0 |
| $30,000 | $0 | $354 | $354 |
| $40,000 | $0 | $654 | $654 |
| $50,000 | $125 | $929 | $804 |
| $60,000 | $375 | $1,179 | $804 |
| $70,000 | $625 | $1,429 | $804 |
| $80,000 | $875 | $1,679 | $804 |
| $90,000 | $1,125 | $1,929 | $804 |
| $100,000 | $1,375 | $2,179 | $804 |
| $120,000 | $1,875 | $2,679 | $804 |
| $140,000 | $3,275 | $3,729 | $454 |
| $160,000 | $4,675 | $3,729 | -$946 |
| $180,000 | $6,075 | $3,729 | -$2,346 |
| $200,000+ | $9,075 | $4,529 | -$4,546 |
This redesign aims to distribute tax relief more extensively to low and middle-income taxpayers, who have been disproportionately affected by rising living costs. Treasury estimates suggest that approximately 13.6 million taxpayers will benefit from the revised stage three plan.
Treasurer Jim Chalmers has consulted with RBA Governor Michele Bullock, who anticipates no significant impact on the central bank’s inflation projections due to these tax adjustments.
Despite weeks of criticism from Opposition leader Peter Dutton regarding the Prime Minister’s reversal on tax cut promises, the opposition ultimately chose not to impede the passage of the bill through the Senate. However, Dutton has hinted at unveiling a new taxation policy for the upcoming federal election. Prime Minister Anthony Albanese has emphasized that the revised plan maintains a similar cost of $107 billion to the original stage three proposal, underscoring the importance of fiscal responsibility. He also challenges the opposition to clarify their stance on balancing tax cuts with funding for essential services.
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FAQ
What are the revised Stage Three tax cuts?
The revised Stage Three tax cuts adjust income tax rates, reducing the 32.5% rate to 30% and retaining the 37% rate for a broader income range.
Who benefits the most from the revised tax cuts?
Low and middle-income earners benefit the most, with larger tax cuts compared to the original plan.
What is the impact on high-income earners?
High-income earners will receive smaller tax cuts than initially proposed, particularly those earning over $150,000.
How will the changes affect someone earning $80,000 annually?
They will receive a tax cut of $1,679, up from $875 under the original plan.
What about individuals earning $200,000 a year?
They will get a tax cut of $4,529, reduced from the $9,075 initially proposed.
Why did the government revise the tax cuts?
The revisions aim to provide more equitable relief, addressing the increased cost of living pressures on low and middle-income earners.
How many taxpayers will benefit from the revised plan?
Approximately 13.6 million taxpayers are expected to benefit from the changes.
Will the revised tax cuts affect inflation?
According to RBA Governor Michele Bullock, the tax changes are not expected to impact the central bank’s inflation forecast.
What was the cost of the revised tax cuts?
The revised plan costs around $107 billion, similar to the original Stage Three proposal.
What are the current Australian tax brackets before the revision?
- Up to $18,200: no tax
- $18,201 to $45,000: 19%
- $45,001 to $120,000: 32.5%
- $120,001 to $180,000: 37%
- Above $180,000: 45%
What are the revised tax brackets?
- Up to $18,200: no tax
- $18,201 to $45,000: 16%
- $45,001 to $135,000: 30%
- $135,001 to $190,000: 37%
- Above $190,000: 45%
What prompted the government to change the tax policy?
Economic conditions, such as post-pandemic recovery, global inflation, and interest rate changes, necessitated the policy adjustment.
How did the opposition react to the revised tax cuts?
Initially critical, the opposition ultimately did not block the bill but plans to propose an alternative tax policy in the next election.
Did the government break any promises with the revised tax cuts?
Yes, Labor had previously promised not to alter the legislated tax cuts but revised them due to changing economic circumstances.
What justification did PM Albanese give for the policy change?
PM Albanese stated that adapting economic policy to current conditions was necessary and emphasized the importance of providing relief to those most affected by cost-of-living pressures.