Read the below to review the details of the legislated and proposed Stage 3 Tax Cuts commencing 1 July 2024.

Stage 3 Tax Cuts

In January 2024, Anthony Albanese announced that the Federal Cabinet is moving to change the Stage 3 tax cuts that have been legislated under the prior Morrison Government. These tax cuts are to commence from 1 July 2024 under the legislated and new proposed changes. This reflects a backflip in Mr Albanese’s pre-election promise not to make any changes to what his predecessor had legislated back in 2019.

To see details of the legislated and proposed Stage 3 Tax Cuts, you can watch my video by clicking on the video below.

The announcement does little to strengthen the confidence of the public in our politicians, as Trust is the cornerstone of our representative democracy. As financial advisers, we appreciate all too well the importance of trust in the relationships we have, so it is disappointing in that regard.

It’s no secret that certain income earners are struggling more than others in this recent high-inflation environment, so the proposed changes will provide some relief for those most in need, which we are pleased about. However, tax cuts are unlikely to help with easing inflation and so we expect these proposed changes may result in inflation coming down at a slower pace.

For those servicing a mortgage on their home at around 6%, those low-and-middle income earners may have a few more dollars of disposable income but may also be servicing higher interest repayments for longer, which seems counterproductive.

Our tax system has a significant focus on Income Tax as the source of the majority of our country’s tax revenue, coming in as the highest in all OECD countries. So, whilst the proposed Stage 3 tax cuts have some positive components, current and future Governments are going to need to focus more on broader tax reform.

And when you look under the hood, comparing the legislated tax cuts with what’s proposed, you’ll see that “bracket creep” is digging its roots back into the Australian tax landscape with these proposed changes. We expect wages to grow over time and people will be pushed into higher tax brackets, where their purchasing power is actually being reduced by virtue of inflation plus additional personal income tax.

The current legislated tax cuts see a flat 30% tax rate applied to everyone with taxable income between $45,000 and $200,000. When we think about trying to improve productivity, this flat 30% tax range allows people to try and earn more money without necessarily being penalised by being pushed into a higher tax bracket. Adding more tax brackets (reintroducing the previously abolished 37% tax rate, for example) may have the negative impact of dampening productivity as people feel they aren’t going to be better off after the additional tax they’ll have to pay.

For example, consider a common scenario where one member of a professional couple is working 3-4 days a week to help with managing a young family, whilst the other works 5 days a week. This sees 1-2 days a week of additional productivity unutilised, from an economic standpoint. Socially and for the family, I personally think it’s a great position to be in where both parents aren’t forced to work 5 days a week just to get by, but with more tax brackets there is a financial disincentive to work the additional 1-2 days a week, not to mention other pressures such as additional daycare fees.

Stage 3 tax cuts, whichever way you look at them, are going to leave all taxpayers with a little more money in their pocket. With wages growth lagging inflation, especially over the past couple of years, we’ll all welcome it. I think it’s fair to say we’ll continue to see changes with respect to taxation.

From a financial strategy perspective, the key takeout is that, generally speaking, a tax deduction is likely to be more valuable this year than it will be next year. And a taxable event may be more tax efficient next year than it might be this year. Importantly, there is a lot more to this equation that an understanding of your financial position will uncover.

Our strategic advice, wealth management, asset structuring and cashflow management will all be conscious of these changes and the right thing to do depends on your specific circumstances and objectives. Most of the population will simply do nothing in anticipation of these changes coming in but some of you will make sure your strategy is reviewed and finessed, getting the most out of your financial resources and capabilities. After all, this will give you the greatest chance of achieving your financial freedom.

If you are interested in a trusting and genuine partnership for your financial journey, please reach out to us at Strategy First Financial Planning for Independent, fee for service advice, focussed on promoting your financial wellbeing. You can contact us here.

This information is general advice only and does not take into account your objectives, financial situation and needs.  Before making a financial decision based on this advice, you must consider whether it is appropriate in light of your needs, objectives and financial circumstances, and where relevant, obtain personal financial, taxation or legal advice. Where a financial product has been mentioned, you should obtain and read a copy of the Product Disclosure Statement prior to making any decisions.