In the realm of politics, a tax cut can swiftly transform from a promise to a policy shift, especially during election times. The question on politicians’ minds then becomes: how can one deviate from the promise without facing repercussions? Recently, the Labor Party found itself in this predicament surrounding Stage 3 tax cuts, maintaining its stance both before and after the election, despite knowing about consultations with the Treasury regarding potential changes.
Changing an election promise, especially concerning tax cuts, can be a challenging ordeal for most politicians. Yet, the Federal Government has endeavored to present a positive spin on the alterations, attempting to redirect benefits while still extending some advantages to higher-income earners.
The modifications to the Stage 3 tax cuts result in a redistribution of tax benefits, shifting away from those earning over $150,000 and directing them towards lower-income individuals. Individuals anticipating a tax cut of just over $9,000 will now see this amount halved. In turn, lower-income earners will receive relief through adjustments to income bands and changes in the application of the Medicare Levy.
It’s worth noting that the top marginal rate in Australia, applicable for income over $190,000, is comparatively low internationally. Had it been subject to Consumer Price Index (CPI) adjustments, it would be around $250,000 now. The issue of bracket creep remains evident.
So, what exactly is changing, and how does it all unfold?
The new tax bandings, effective from July 1, 2024, showcase the updated:
| 2024 Existing | Rate | 2025 New Thresholds | Rate | Cumulative |
| $-$18,200 | 0.0% | $-$18,200 | 0% | – |
| $18,201-$45,000 | 19.0% | $18,201-$45,000 | 16% | $4,288 |
| $45,001-$120,000 | 32.5% | $45,001-$135,000 | 30% | $31,288 |
| $120,001-$180,000 | 37.0% | $135,001-$190,000 | 37% | $51,637 |
| >$180,000 | 45.0% | >$190,000 | 45% | $56,137 |
These changes in tax rates translate to a reduced tax saving for higher-income earners, such as someone earning $200,000, now receiving $4,529 instead of the originally legislated $9,075. Those earning $150,000 see a comparable reduction in tax savings, approximately $3,975. While higher-income earners still receive a tax cut, it deviates from the promised one.
The savings at the top end have been reallocated to lower-income earners, with those earning $45,000 now expected to receive a tax saving of $804, contrary to the initially legislated unchanged status. The intention behind these adjustments is to offer cost-of-living relief to lower and middle-income families. However, questions linger about whether these changes might drive inflation, given the potential for lower-income earners to circulate income through the economy, potentially offsetting the cost-of-living relief.
For any enquiries on how these changes may impact you, please feel free to reach out to your Quantiphy contact.
