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The personal income tax cuts legislated to commence on 1 July 2024 will be realigned and redistributed under a proposal released by the Federal Government.
After much speculation, the Prime Minister has announced that the Government will amend the legislated Stage 3 tax cuts scheduled to commence on 1 July 2024. Relative to the current Stage 3 plan, the proposed redesign will broaden the benefits of the tax cut by focussing on individuals with taxable income below $150,000. If enacted, an additional 2.9 million Australian taxpayers are estimated to take home more in their pay packet from 1 July.
It’s not how Stage 3 of the 5 year plan to restructure the personal income tax system was supposed to work, but a sharp escalation in the cost of living has reshaped community sentiment. As the Prime Minister said, “we are focussed on the here and now” and by default, not on long term structural change.
The redesign will increase Government revenues from personal income tax by an estimated $28 billion to 2034-35 as bracket creep takes its toll.
What will change?
The revised tax cuts redistribute the reforms to benefit lower income households that have been disproportionately impacted by cost of living pressures.
| 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 |
Under the proposed redesign, all resident taxpayers with taxable income under $146,486, who would actually have an income tax liability, will receive a larger tax cut compared with the existing Stage 3 plan. For example:
- An individual with taxable income of $40,000 will receive a tax cut of $654, in contrast to receiving no tax cut under the current Stage 3 plan (but they are likely to have benefited from the tax cuts at Stage 1 and Stage 2).
- An individual with taxable income of $100,000 would receive a tax cut of $2,179, which is $804 more than under the current Stage 3 plan.
However, an individual earning $200,000 will have the benefit of the Stage 3 plan slashed to around half of what was expected from $9,075 to $4,529. There is still a benefit compared with current tax rates, just not as much.
There is additional relief for low-income earners with the Medicare Levy low-income threshold increasing by 7.1% in line with inflation. It is expected that an individual will not start paying the Medicare Levy until their income reaches $26,000 and will not pay the full 2% until $32,500 (for singles).
While the proposed redesign is intended to be broadly revenue neutral compared with the existing budgeted Stage 3 plan, it will cost around $1bn more over the next four years before bracket creep starts to diminish the gains.
It’s Not a Sure Thing Yet!
The Government faces a critical timeline to enact the amending legislation required to implement the redesigned Stage 3 tax cuts by 1 July 2024. Securing the support of independents or minor parties will be key to ensuring the legislation passes through Parliament. With Parliament resuming on 6 February 2024, the clock is ticking for these changes to become a reality.
How Did We Get Here?
The journey toward these changes began with the 2018-19 Federal Budget, which introduced a personal income tax plan aimed at addressing the growing issue of ‘bracket creep.’ Bracket creep occurs when personal income tax rates fail to keep pace with wage growth, leading to individuals paying more tax over time despite no real increase in purchasing power.
The three-point plan was designed to restructure personal income tax thresholds and rates, simplifying the system and reducing the tax burden on many individuals. It aimed to bring Australia’s personal income tax structure closer to that of comparable countries, such as New Zealand, where the top marginal tax rate is 39% for incomes above $180,000.
The incremental changes under the plan were rolled out in stages, with the first taking effect from 1 July 2018 and the second from 1 July 2020. The final stage, initially legislated for 1 July 2024, remains under consideration and would mark the culmination of these reforms.
What’s Next for Personal Income Tax Reform?
The redesigned Stage 3 tax cuts provide an opportunity to reassess personal income tax strategies, particularly for individuals with taxable income of $150,000 or more. While the new plan offers fewer tax planning opportunities than the current structure, it’s still crucial to understand how the changes could impact your personal income.
If the legislation is enacted, individuals at higher income levels may see a reduction in their tax burden, potentially providing more disposable income. However, any change to personal income tax rates presents an opportunity to review your financial situation. Adjustments may be needed to ensure you’re optimizing tax strategies, minimizing liabilities, and taking full advantage of available deductions and concessions.
Take Action Now
If you’re concerned about how these potential changes to personal income tax rates could affect you, now is the time to act. Waiting until the legislation passes could limit your ability to make strategic adjustments.
For those with taxable incomes approaching or exceeding $150,000, the redesigned tax structure offers a chance to revisit your approach to personal income management. Whether it’s maximizing superannuation contributions, exploring investment opportunities, or simply ensuring compliance with the new thresholds, proactive planning is essential to avoid paying more tax than necessary.
Plan Ahead for Personal Income Success
Tax reform can bring uncertainty, but it also presents an opportunity to reset and strengthen your financial position. With personal income tax changes on the horizon, seeking expert advice and staying informed will help you make the most of what lies ahead. Reach out to us to discuss your personal income tax strategy and ensure you’re prepared for whatever changes come your way.
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