What are the Stage 3 tax cuts and how will they affect you?
The Stage 3 income tax cuts form a major part of Australia’s long-term personal tax reform plan. Below is a clear explanation of what they are, why they have changed, and how they may affect workers at different income levels from 1 July 2024.
Why Stage 3 tax cuts have been controversial
Discussion around the Stage 3 tax cuts has intensified in recent years. These cuts were originally legislated in 2019 by the former government, with support from the then Labor opposition.
During the election campaign and after forming government, the Prime Minister repeatedly stated that the Stage 3 tax cuts would remain unchanged. However, ongoing cost-of-living pressures and inflation led to strong calls for the cuts to be reshaped to provide greater relief to low and middle-income earners. This resulted in the government introducing amending legislation ahead of the 1 July 2024 start date.
As originally designed, the Stage 3 tax cuts primarily benefited individuals earning above $45,000, with the largest benefits flowing to higher income earners.
Current personal income tax rates
Under the current system, individuals are taxed as follows:
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$0 to $18,200: no tax
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$18,201 to $45,000: 19% of the amount over $18,200
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$45,001 to $120,000: $5,092 plus 32.5% of the amount over $45,000
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$120,001 to $180,000: $29,467 plus 37% of the amount over $120,000
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$180,001 and above: $51,667 plus 45% of the amount over $180,000
Original Stage 3 tax cut structure
Under the originally legislated Stage 3 model, from 1 July 2024:
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Taxable income from $45,001 to $200,000 would be taxed at 30%
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Income above $200,000 would be taxed at 45%
This significantly flattened the tax scale and delivered the largest dollar benefits to high-income earners.
How the revised Stage 3 tax cuts work
Under the government’s revised model, the tax cuts are more targeted toward low and middle-income earners. From 1 July 2024:
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The 19% tax rate is reduced to 16% for incomes between $18,201 and $45,000
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A new 30% tax rate applies to incomes from $45,001 to $135,000
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The 37% tax rate applies from $135,001 to $190,000
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The top marginal rate of 45% applies from $190,001 and above
How the changes affect average earners
According to ABS data, median full-time earnings are approximately $1,600 per week, or $83,200 per year.
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Under current tax rates, tax payable is around $17,507
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Under the original Stage 3 tax cuts, tax payable would be around $16,552
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Under the revised Stage 3 changes, tax payable falls further to approximately $15,748
This means an average worker is better off under the revised model than under both the current system and the original Stage 3 design.
Impact on higher income earners
ABS data indicates workers earning around $2,820 per week, or $146,640 per year, sit in the 90th percentile of income earners.
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Current tax payable is approximately $39,323
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Under original Stage 3 tax cuts, tax payable would drop to around $35,584
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Under the revised model, tax payable is around $35,594
While this group receives slightly less benefit under the revised model compared to the original Stage 3 design, they are still significantly better off than under the current system.
At the upper end, individuals earning $200,000 would have received tax savings of more than $9,000 under the original Stage 3 model. The revised approach reduces this benefit, redirecting more relief toward lower income earners.
What happens next?
The government has moved to pass the revised tax changes ahead of 1 July 2024. While opposition parties have indicated resistance, support from minor parties and independents makes it likely the changes will proceed.
Talk to our accountants about your tax position
Understanding how the revised Stage 3 tax cuts apply to your individual circumstances is key to effective tax planning.
Speak to one of our accountants if you have any questions about the changes in tax for 2023.
