Stage 3 Tax Cuts Explained

By Mark Chapman 4 min read

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 challenging 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.
 

What does the income tax system look like now?

The first $18,200 of annual earnings is not taxable (the so-called tax-free threshold). Then there are four tax brackets: individuals pay 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.

Current 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 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!
 

New tax table, from July 1st 2024, with legislated Stage 3 tax cuts

Bracket Income Range Marginal Tax Rate Tax Payable
1 $0-$18,200 0% Nil
2 $18,201-$45,000 19% 19% of excess over $18,201
3 $45,001-$200,000 30% $5,092 + 30% of excess over $45,000
4 $200,001+ 45% $51,592 + 45% of excess over $200,000
 

What are the proposed changes?

The Prime Minister, Anthony Albanese, has unveiled the new Stage 3 tax cuts in a speech to the National Press Club this afternoon. Key features 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, with proposed and revised (on 25 January 2024) Stage 3 tax cuts

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, the Prime Minister announced 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. The threshold currently exempts people earning $24,276 or less from paying the Medicare levy. After that, the levy increases gradually and the full 2 per cent levy is paid by anyone earning more than $30,345. Those thresholds are changing to $26,000 and $32,500, which represent a 7.1 per cent increase 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

Book an appointment online today

Related Articles

Caution! Your tax refund might be far smaller than you’re expecting this year.
3 min read
The Treasurer, Jim Chalmers, handed down his Federal Budget for the new financial year on Tuesday...
2.28 minutes min read
Every Tax Time, the ATO focusses on certain hotspots where taxpayers are prone – either accidenta...
5 min read
We’ve got a change of government but what does Labor’s win on Saturday night mean for your taxes?
4 min read