Everything You Need to Know About the Stage 3 Tax Cuts

After July 1, 2024, the tax cuts will be effective.

[Updated April 20, 2023]

What Are the Stage 3 Tax Cuts?

The stage 3 tax cuts are due in July 2024. They are part of the government’s income tax package, introduced and legislated in 2018 and 2019. Under the stage 3 tax cuts, the 37% tax bracket would cease while the 32.5% bracket would drop to 30%. The threshold for the top tax bracket would also rise from $180,000 to $200,000.

Reasons for Introducing the Stage 3 Tax Cuts

The stage three tax cuts are part of a tax package the Australian government announced in 2018. The objective of the tax package was to update tax bracket thresholds for inflation. It was to be a solution to bracket creep, which threatened to increase average tax rates. Specifically, the stage 3 cuts aimed to trim the marginal rates by creating a wide tax band with a constant marginal rate.

What Will Happen When the Stage 3 Tax Cuts Are in Place?

After July 1, 2024, the tax cuts will be effective. Some of the expected changes include:

  • The higher tax threshold will increase from $180,000 to $200,000
  • The $120,001 – $180,000 tax bracket will cease
  • Income between $45,001 and $200,000 will be taxed at 30%

Once they take effect, the stage 3 cuts are likely to cause an economic ripple effect. To bear the cost of the cuts, the government may reduce budget expenditure. That would mean that it may spend less on welfare programs. That may trickle down to the expenditure of most Australians.

As the government decreases spending on welfare, households are likely to reduce their demand since they no longer enjoy benefits from the welfare programs. Thus, instead of injecting money into the economy, the cuts may result in tighter economic measures.

What the Stage 3 Tax Cuts Mean for the Different Income-Earners

Using the progressive income tax system that Australia uses, high-income earners pay more in taxes compared to lower-income earners. However, the stage 3 cuts will result in more benefits for high-income earners. Estimates indicate that the tax cuts will cost $243.5 cumulatively. A closer look at how the tax cuts work shows that 6% of the cuts would go to the richest 1% while up to 77% of the tax cuts would benefit the richest 25%. The stage 3 tax cuts effectively benefit those earning $180,000, who is just 3.7% of all income earners. This group of earners would receive 48% of the total benefits.

  • High-Income Earners

The changes to the tax brackets and tax rates under the stage 3 cuts would have the biggest impact on high-income earners. First, the changes increase the threshold of the higher tax bracket from $180,000 to $200,000. That means that some higher income earners would fall into the $45,001 – $200,000 bracket, which attracts tax at the rate of 30%.

Under the current tax brackets, anyone earning $180,001 and over pay tax at 45$. With the changes, high-income earners falling below $200,001 would pay tax at the rate of 30%. That is a drop of up to 15% for such taxpayers on earnings above $45,000. For those earning $200,001 and above, the tax rate would remain at 45% as it has been.

  • Medium-Income Earners

Medium-income earners would also benefit from the stage 3 cuts. The changes set in for earnings starting from $45,001. Under the $45,001 – $200,000 tax bracket, the tax rate would be 30%, which is a drop from 32.5% previously used for the $45,001 – $120,000 tax bracket. The changes also do away with the $120,001 – $180,000 tax bracket taxed at 37$. That means that medium-income earners falling within this tax bracket would be paying at least 2.5% and up to 7% less than they have been paying for earnings above $45,000.

  • Lower Income Earners

For most low-income earners, the stage 3 cuts will not have a big effect on their taxes. That is because the tax rates and brackets remain relatively the same as they have been in the past. Earnings of $18,200 and below will continue to be tax-free while earnings between $18,201 and $45,000 would be taxed at 19%, which is the current tax rate. The only low-income earners to benefit from the tax cuts will be those earning above $45,000. Their tax rate for income from $45,001 would be 2.5% less than the current rate.

Man counting money.

When Do The Stage 3 Cuts Come Into Effect?

The stage 3 tax cuts Australia will be rolling out are already legislated as part of a tax package announced in 2018. They will kick in on July 1, 2024, as per law.

Why Many Australians Want The Stage 3 Cuts Plan To Be Scrapped

Surveys show that a majority of Australians support the repealing of the stage 3 tax cuts Australia is about to roll out. According to the Australian Institute, results from their poll indicate that 41% of Australians want the government to scrap the tax cuts. Only 22% of Australians want the tax cuts to come into effect. Most of those in support of repealing the tax cuts earn more than $80,000. Based on the benefits of the cuts, these income earners fall within the group that would benefit most from the tax changes, yet they oppose them. The more people are aware of, and understand the details of the tax cuts, the more likely they are to support scrapping them, regardless of their tax bracket.

Those opposed to the implementation of the tax cuts claim that the cuts are expensive and would prove a burden. The cost of the tax cuts would be about $20 billion per year and about $243 billion in ten years. That may cause constant budget deficits that may prove problematic to the government.

Another argument against the tax cuts is that they are not equitable. They appear to benefit high-income earners more than low-income earners. The three cuts would result in a significant cut in taxes against high-income earners while barely affecting low-income earners. Thus, they would result in an increase in net income for high-income earners.

61% of Australians feel that there can be other, more effective policies than the tax cuts. They believe the government should develop an economic policy that would suit changing circumstances rather than pushing on with the rolling out of the tax cuts. Comparatively, the economic conditions have changed greatly since 2018 when the tax cuts were first announced. Thus, the impact envisaged may not be the same under current economic circumstances.

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Key Takeaways

Bar new legislation repealing them, the stage 3 tax cuts will take effect from July 1, 2024. They will have a huge impact on medium to high-income earners. Though there has been a clamour to repeal the tax cuts, they remain legislated. However, mounting opposition to the costs may force the government to scrap them. There are arguments on the inequitable nature of the tax cuts as well as their net cost, which support their scrapping. A majority of Australians feel the tax cuts are unnecessary and only increase inequality. They prefer a better economic policy that will be able to keep abreast with changing economic circumstances.


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