Proposed Redesign of Stage 3 Tax Cuts

The Federal Government has proposed a significant realignment and redistribution of the legislated Stage 3 personal income tax cuts, initially set to take effect on July 1, 2024. 

Following heightened speculation, the Prime Minister announced a strategic amendment to the existing plan, focusing on broadening the benefits for individuals with taxable income below $150,000. 

This proposed redesign aims to address community concerns arising from a sharp increase in the cost of living, with a keen emphasis on immediate relief rather than long-term structural change.

Under the proposed changes, an estimated 2.9 million Australian taxpayers stand to gain more in their pay packets from July 1, deviating from the original Stage 3 plan. This shift in approach is a response to the prevailing sentiment and the Government’s commitment to addressing pressing economic challenges. 

The redesigned plan is projected to increase government revenues from personal income tax by approximately $28 billion until 2034-35, primarily due to the effects of bracket creep.

Key Changes in the Redesigned Plan:

• Targeted Benefit Expansion: The revised tax cuts are strategically redirected to benefit lower-income households disproportionately affected by the rising cost of living. Residents with taxable income under $146,486 are to receive more substantial tax cuts compared to the existing Stage 3 plan.
• Examples of Tax Impact: Individuals with taxable income of $40,000 are set to receive a tax cut of $654, in contrast to no tax cut under the current Stage 3 plan. Meanwhile, those earning $100,000 would experience a tax cut of $2,179, an $804 increase from the original plan. However, individuals earning $200,000 will see their expected benefit reduced by half, from $9,075 to $4,529.
• Medicare Levy Adjustments: Low-income earners will find relief in the redesigned plan, with the Medicare Levy low-income threshold increasing by 7.1% in line with inflation. Individuals are expected to start paying the Medicare Levy only when their income reaches $26,000 and will not pay the full 2% until $32,500 for singles.

While the proposed redesign aims for broad revenue neutrality compared to the existing budgeted Stage 3 plan, it is anticipated to cost around $1 billion more over the next four years before bracket creep starts to mitigate the gains.

Background and Future Considerations:

The personal income tax plan, initially introduced in the 2018-19 Federal Budget, aimed to combat the issue of ‘bracket creep.’ The three-point plan, implemented from 2018 to 2020, sought to simplify tax thresholds, reduce the tax burden and align Australia with comparable nations. Stage 3, originally set for 2024, is now subject to this proposed redesign.

For individuals with taxable income of $150,000 or more, the redesigned Stage 3 tax cuts offer fewer planning opportunities. However, any alteration in tax rates provides an opportunity for review and reset, ensuring individuals capitalise on available opportunities and avoid unnecessary financial burdens. 

If you have concerns about the impact of these proposed changes, we encourage you to reach out to your Simmons Livingstone advisor on 1800 618 800 or via email at admin@simmonslivingstone.com.au.