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Due 1 July 2024, the stage 3 tax cuts are the last piece of the federal government’s three-phased tax reform plan, which is to come into effect for the 2024/25 financial year. Legislated in 2019, the stage 3 cuts will apply a 30 per cent tax rate on income earners between $45,000 and $200,000.
For example, the current existing tax brackets of 32.5–37 per cent will be combined into a singular tax bracket of 30 per cent, affecting those earning between $45,001 and $120,000, while the top tax threshold (45 per cent tax bracket) will begin for those earning $200,000 (previously $180,000).
The changes, as they stand, would remove the 32.5 per cent and 37 per cent tax brackets and increase the minimum income level for those who sit in the 45 per cent tax bracket.
Those earning $200,000 are set to receive a tax break of approximately $9,000 annually as a result.
While media reports have suggested that the Albanese Government may reduce the upper income limit and bring in a tax cut for lower income earners, this has not yet been confirmed by government.
The laws were introduced by the Morrison government in a bid to give more money back to the majority of taxpayers. It has already been legislated.
However, the efficacy of the stage 3 tax cuts has been brought into question, particularly regarding how it will affect the Reserve Bank of Australia’s (RBA) monetary policy decision-making and its ongoing battle with inflation.
Speaking to Mortgage Business, director and mortgage broker for FinAus, Pankaj Angrish, stated that the stage 3 tax cuts are not a solution to the “so-called bracket creep issue” and that the RBA has “made it clear that allowing stage 3 to go forward in its current form will only fuel inflation and likely result in higher interest rates for all”.
“I firmly believe that there is considerable room for improvement in the current proposal, and rather than adhering strictly to the existing plan, adjustments should be made to better address the issue of bracket creep,” Mr Angrish said.
“In light of inflation-driven rate increases, the proposed tax cuts may inject cash into the hands of those in need, but the resulting increase in spending could intensify inflationary pressures.
“Considering the economic implications, it is imperative to comprehend the potential consequences of these changes and, if necessary, introduce additional steps or defer implementation.”
Mr Angrish suggested that while support for financially vulnerable individuals was “undoubtedly needed”, there needs to be a targeted approach. He said implementing a "one-size-fits-all strategy is insufficient”.
Indeed, economist Chris Richardson recently suggested that the stage 3 tax cuts will “simply delay the eventual relief from the Reserve Bank” as the tax cuts will be equivalent to rate cuts of 0.5–0.75 per cent, meaning that the first cost-of-living relief will come for taxpayers and not borrowers.
According to ANZ head of Australian economics Adam Boyton, translating these tax cuts into an interest rate equivalent is “difficult as the various policy leavers work differently across the economy”.
“That said, we can examine the impact on the household sector through the national accounts household income account,” Mr Boyton said.
“Since the December quarter 2021, the household sector’s total quarterly interest bill has risen $22 billion, or almost $90 billion annualised. Over that time, the cash rate rose 400 basis points (the latest national accounts data are for the September quarter 2023).”
Mr Boyton added that since there are still fixed-rate loans yet to roll off and with national accounts data being quarterly averages, this would imply that the tax cuts have “roughly about the same impact on the household income as three 25 basis point rate cuts”.
Low-income mortgagors to be ‘worst off’; Calls to remove the stage 3 cuts
The Australian Greens Party yesterday (23 January) urged Treasurer Jim Chalmers to scrap the stage 3 tax cuts altogether due to its potential to worsen inflation, arguing it would result in “two-thirds of taxpayers on lower incomes pay[ing] more tax”.
The call came as the updated MYEFO revealed the tax cuts would inject an additional $300 million into the economy, thereby increasing the likelihood that the RBA’s hand would be forced to increase interest rates, according to the Greens.
Senator and acting leader of the Greens, Mehreen Faruqi, said that those earning between $50,000 and $100,000 would “be the worst off” under the stage 3 tax cuts.
“They will see very little from stage 3, and will see their mortgages go up when the tax cuts make inflation harder to control,” Senator Faruqi stated.
“When their caucus meets tomorrow, Labor must listen to the Greens and axe the stage 3 tax cuts.”
Additionally, Senator Nick McKim suggested that the Treasurer had not consulted with the Treasury to “model their inflationary impacts of the stage 3 tax cuts, even though they’re getting more expensive by the day”.
“Mortgage holders and renters will be the ones paying the most for these tax cuts for the rich,” Senator McKim said.
However, Prime Minister Anthony Albanese doubled down and affirmed that the government has no intentions of changing its position on what has been legislated.
“One of the perceptions which is there is that somehow all of it is at the top end. That, of course, isn’t the case,” Mr Albanese said during an interview with ABC Radio Sydney last week (19 January).
Additionally, the Prime Minister told KIIS FM yesterday (23 January) that “everyone” will be delivered a tax cut.
“Across the board, what we’re doing is looking at how we can help low and middle-income earners,” he said.
“Middle Australia are doing it particularly tough.”
Mr Albanese, however, did not elaborate on or refute the claims of the Labor government considering cutting taxes further for high-income earners.
[RELATED: 1 in 5 cutting back to pay down mortgage: NAB]
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