Stage 3 Tax Cuts Explained

The government’s redesign of the stage three tax cuts represents a recalibration of the original tax cuts package, introduced several years ago by the former Liberal government.

The heavy weighting of the original package towards those on the highest incomes was deemed difficult to justify in the current economic climate. Given the disproportionate impact of the cost of living on low and middle-income taxpayers, the adjustment is seen as a means to provide additional financial relief to hard working families for expenses such as mortgages, food, and fuel bills.
 

The income tax system before the stage 3 tax cuts

The first $18,200 of annual earnings is not taxable (the so-called tax-free threshold). Prior to the tax cuts, there were four tax brackets: individuals paid tax at 19% on earnings between $18,201 and $45,000, 32.5 per cent for earnings between $45,001 and $120,000, 37 per cent for earnings between $120,001 and $180,000, and 45 per cent for every dollar earned over that.

Tax table for tax year 2023-24

Bracket	Income range	Marginal Tax Rate	Tax payable
1	$0-$18,200	0%	Nil
2	$18,201-$45,000	19%	19% of excess over $18,200
3	$45,001-$120,000	32.5%	$5,092 + 32.5% of excess over $45,000
4	$120,001-$180,000	37%	$29,467 + 37% of excess over $120,000
5	$180,001+	45%	$51,667 + 45% of excess over $180,000

 

What were the original stage three cuts?

From July 1 2024, the 37 per cent marginal tax rate was to be abolished for those earning more than $120,000 a year, and the 32.5 per cent tax rate was to be reduced to 30 per cent for people earning between $45,000 and $200,000. This would have meant that there would be a single 30% tax bracket for everyone earning between $45,000 and $200,000. For earnings above $200,000, the current 45% tax rate would be retained.

But as originally designed, the tax cuts delivered most of the benefit to those on high incomes. So, nothing at all for people earning $45,000, only $875 for people earning $80,000 but a whopping $9,075 for people earning $200,000!
 

What are the changes?

Key features of the redesigned tax cuts include:

• A cut in the 19% tax rate to 16%, saving $804 for those on taxable incomes of $45,000
• A cut in the 32.5% rate to 30% for incomes between $45,000 and $135,000 
• Retaining the 37 per cent rate but increasing the threshold for it to apply to $135,000.
• Retaining the current 45% tax rate but increasing the threshold to $190,000 ($10,000 less than in the original design)

The effect of the redesigned package is that those on higher incomes (say, $200,000) will now only benefit by $4,546 as opposed to $9,075.  
 

New tax table, from July 1st 2024

Bracket	Income Range	Marginal Tax Rate	Tax Payable
1	$0-$18,200	0%	Nil
2	$18,201-$45,000	16%	16% of excess over $18,201
3	$45,001-$135,000	30%	$4,288 + 30% of excess over $45,000
4	$135,001-$190,000	37%	$31,288 + 37% of excess over $135,000
5	$190,001+	45%	$51,638 + 45% of excess over $190,000

In addition, there will be an uprating in the Medicare low-income threshold. The Medicare levy is 2 per cent of your taxable income but is not payable by those on low incomes. For the 2024-25 year, the threshold exempts people earning $26,000 or less from paying the Medicare levy. After that, the levy increases gradually and the full 2 percent levy is paid by anyone earning more than $32,500. This represents a 7.1 per cent increase on the 2023-24 thresholds, in line with inflation.

With the cost of the tax cuts package overall remaining the same, this means that the tax savings have been distributed much more widely. They are now focused on low and middle income taxpayers, who were previously not well served by the tax cuts, and who have been suffering from increases in the cost of living and are far more numerous than high income earners (less than 5% of whom earn more than $180,000).
 

Redistribution of tax cuts (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
$250,000	$9,075	$4,529	- $4,546