The proposed changes to the stage 3 tax cuts have been front-and-centre in the news recently, and there has been plenty of commentary on not only the politics, and how these changes actually affect us.
We’re going to cut through all the noise and give you the simple version.
You can also watch a video summary of this article to the right (or just below if you are on a mobile device).
PROPOSED CHANGES ARE JUST THAT - PROPOSED
What has been announced by the Government is not Law. It is a proposed change to the existing Law (known as the Stage 3 tax cuts). If the Government cannot get the support of Parliament and the Senate, none of what has been announced matters.
As the Law stands today, from 1 July 2024, every taxpayer earning over $45,000 will receive a tax cut when compared to the current financial year. Someone earning $50,000 will receive a tax cut of $125, at $80,000 your cut $875, at $120,000 it is $1875, and if you are lucky enough to earn $200,000 (or higher) your tax cut is $9,075.
There is a lot of discussion about the inequity of this (that those with higher income receive a greater tax cut), but we will point out that from 1 July 2024, someone earning $50,000 will pay 13.2% of their income in tax (i.e. their effective tax rate is 13.2%), while someone earning $200,000 will pay 25.8% of their income in tax under the current Law.
THE PROPOSED CHANGES
The changes proposed by the Government will alter the above and will provide additional tax cuts to people earning under $146,486, while providing tax increases to those earning above this figure that scale up to $4,546 for those earning $200,000 or higher.
If the proposed changes get through Parliament and become law, those earning above $146,486 will still pay less tax in the next financial year (2025) compared to this financial year (2024), just not as much as they are currently entitled to. While there is an argument that this is still a tax cut because compared to this year those higher income earners are paying less tax, the reality is that these proposed changes increase their tax obligation compared to the current Law – and therefore should be considered a tax increase to those taxpayers.
Whether it is right or wrong to expect higher income earners to wear a tax increase at this point in time is for each person to decide.
We have created an excel spreadsheet that contains all of the tax rates (2024, currently legislated 2025, and proposed 2025) and includes a calculator that will tell you how you are impacted should these proposed changes become Law. In the spreadsheet there is a clearly labelled yellow cell – all you need to do is put your income there.