Stage 3 Tax Cuts Explained

The government's redesigned Stage 3 tax cuts represent a major shift from the original package introduced by the former Liberal government. The recalibrated plan aims to address concerns about the disproportionate benefit going to higher-income earners, particularly during a time of rising living costs that impact low and middle-income households.

The revised tax cuts are designed to distribute financial relief more equitably, targeting low and middle-income earners and providing additional support for essential expenses like mortgages, food, and fuel.

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The Income Tax System Before the Stage 3 Cuts

Before the implementation of the Stage 3 tax cuts, the income tax structure consisted of four tax brackets:

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Original Stage 3 Tax Cuts

Initially, the Stage 3 tax cuts aimed to significantly lower taxes for high-income earners. The key elements were:

• Abolishment of the 37% tax rate for incomes above $120,000.
• Reduction of the 32.5% rate to 30% for incomes between $45,000 and $200,000, creating a single tax bracket for all income between these thresholds.
• Retention of the 45% rate for income over $200,000.

However, this original plan provided most of the benefits to high-income earners, offering little to middle-income earners. For example, someone earning $80,000 would save $875, while someone earning $200,000 would save a massive $9,075.

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Revised Stage 3 Tax Cuts

To address concerns about fairness, the revised tax cuts have been restructured to provide more relief to low and middle-income earners, while reducing the benefit for high-income taxpayers.

Key Features of the Redesigned Cuts:

• The 19% tax rate is reduced to 16%, providing savings of $804 for those earning $45,000.
• The 32.5% rate is lowered to 30% for incomes between $45,000 and $135,000.
• The 37% rate is retained, but the threshold for its application is raised to $135,000.
• The 45% tax rate remains, but the threshold is lowered to $190,000 (as opposed to $200,000 in the original plan).

The revised structure significantly reduces the tax cut for high-income earners, with those earning $200,000 now receiving $4,546 in tax relief, compared to $9,075 under the original proposal.

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New Tax Table (Effective July 1, 2024)

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Impact on Taxable Income

The changes redistribute the benefits of the tax cuts, significantly lowering the relief available to high-income earners while increasing support for middle-income taxpayers. Here’s how the redistribution works:

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Medicare Low-Income Threshold Adjustments

In addition to the tax cuts, there will be an adjustment to the Medicare low-income threshold. The Medicare levy, which is 2% of taxable income, is not payable by low-income earners.

For the 2024-25 tax year, the threshold will be raised to $26,000 (up 7.1% from the previous year), exempting individuals earning less than this amount from paying the levy. The full 2% levy applies to those earning more than $32,500.

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Conclusion

The revised Stage 3 tax cuts shift the focus to providing greater financial relief to low and middle-income earners, while high-income earners receive smaller benefits compared to the original plan. This redistribution aims to address concerns about fairness, especially in the context of rising living costs.

For more information on how these changes may affect your tax situation, contact Growthfront Accounting for expert advice and assistance in maximizing your tax benefits.