There could be changes to the stage 3 tax cuts. What were they supposed to be? (2024)

Prime Minister Anthony Albanese has been talking a lot about "stage 3 tax cuts" this week, hinting that lower-income earners may see some tax relief.

That may mean tweaking the third stage of a major taxation reform scheme, which was initially brought in by the previous Coalition government.

We're still not sure what this will mean because it's due to be discussed in a cost-of-living meeting on Wednesday afternoon.

Until we know more, here's a quick refresher on the scheme to get you up to speed.

What are the stage 3 tax cuts?

It's the third round in a series of tax changes introduced by the then-Coalition government in 2018 and 2019.

The first and second stages were implemented a few years ago.

Under that legislation, the third stage is due to take effect on July 1 this year.

Even though there's been a change of government since stages 1 and 2 were implemented, we were still expecting stage 3 to roll out as legislated by the Coalition with Labor's reluctant support under the new Albanese government.

That's because Mr Albanese went into the last election saying his government wouldn't be changing the plan.

But now it looks like there may be changes after all — more on that later on.

Why were the tax cuts introduced?

We were told the aim of the three-stage plan was to:

  • reduce tax for the majority of individuals
  • simplify the tax system
  • protect middle-income earners from bracket creep

What is bracket creep?

Bracket creep is when someone ends up paying a bigger fraction of their income in tax because of a marginal pay rise.

This is because not everyone is taxed at the same rate — the idea is that the more people earn, the higher their tax rate is (well, up to a point, as you'll see below).

The amount of tax people pay depends on what tax bracket they're in.

And what tax bracket they're in depends on how much they earn.

Currently, there are five tax brackets.

Here's how Australia's tax system works at the moment:

  • Earn up to $18,200 – pay no tax
  • Earn $18,201 to $45,000 – pay 19c for each $1 over $18,200
  • Earn $45,001 to $120,000 – pay $5,092 plus 32.5c for each $1 over $45,000
  • Earn $120,001 to $180,000 – pay $29,467 plus 37c for each $1 over $120,000
  • Earn $180,001 and higher– pay $51,667 plus 45c for each $1 over $180,000

So, say someone was earning $45,000 and got a $5,000 pay rise.

They'd now be earning $50,000, but paying the same rate of tax on that additional $5,000 as someone earning more than double their wage.

What happened in the Stage 1 and 2 tax cuts?

Stage 1 — four years of tax-back bonuses

Stage 1meant some people got extra money in their tax returns.

It was called the low- and middle-income tax offset (LMITO) – which was nicknamed "the Lamington".

Here's what they were in the past:

  • 2018-19 financial year: Maximum of$1,080
  • 2019-20 financial year:Maximum of$1,080
  • 2020-21 financial year:Maximum of$1,080
  • 2021-22 financial year: Maximum of $1,500

But these bonuses stopped in July 2022, so people didn't get that extra money for the 2022-23 financial year.

In fact, the ABC heard of manypeople ending up with a tax bill instead of getting a refund when they filed their returns last year.

Stage 2 — tax bracket tweaks

This part of the plan allowed some people to earn a little more before they started being taxed at a higher rate.

It changed the parameters of three of the five tax brackets— which, before then, hadn't been changed in years.

This table compares the brackets before and after stage 2changes took effect for the 2020-21 financial year:

Tax rate

Before Stage 2

After Stage 2

No tax

0 – $18,200

0 – $18,200

Low rate

$18,201 – $37,000

$18,201 – $45,000

Marginal rate

$37,001 – $90,000

$45,001 – $120,000

Middle rate

$90,001 – $180,000

$120,001 – $180,000

Highest rate

$180,001 and over

$180,001 and over

What is the current plan forstage 3?

Stage 3 of the plan was to cut the number of tax brackets from five down to four.

This was supposed to cut out the 37 per cent bracket and lower the 32.5 per cent bracket to 30 per cent.

This change wouldallow people to earn $200,001 before being taxed at the highest rate.

Just to refresh, here's what the brackets are now:

  • Earn up to $18,200 – pay no tax
  • Pay a 19 per cent tax rate on each dollar earned between 18,201-$45,000
  • Pay a 32.5 per cent tax rate on each dollar earned between $45,001 to $120,000
  • Pay a 37 per cent tax rate on each dollar earned between $120,001 to $180,000
  • Pay a 45 per cent tax rate on each dollar earned above $180,000

And here's what the brackets would be if stage 3 is rolled out as planned:

  • Earn up to $18,200 – pay no tax
  • Pay a 19 per cent tax rate on each dollar earned between$18,201-$45,000
  • Pay a 30 per cent tax rate on each dollar earned between $45,001-$200,000
  • Pay a 45 per cent tax rate on each dollar earned above $200,000

"On the face of it, it seems like a big win for middle and upper middle income earners,"ABC business editor Michael Janda says.

"But the real winners are high income earners."

He goes into more depth in this video explainer from last year (so keep that in mind with his time references):


Are the stage 3 tax cuts still happening?

Probably, but just not in the same way we were expecting.

As we touched on before, Mr Albanese said he wouldn't be changing the plan before he was elected prime minister.

And he has repeatedly said he is sticking to the plan.

But critics of the plan say it's a big benefit for higher income earners, with middle earners seeing only a minor boost, and low income earners getting nothing.

And this criticism has grown during the current cost-of-living crisis, putting pressure on the Labor government to help lower and middle income earners.

On Tuesday, Mr Albanese told radio station KIIS FM that "everyone" would get a tax cut.

And, as pointed out by ABC political reporter Tom Crowley, this would mean changing stage 3:

"Labor backbenchers who spoke to the ABC confirmed they expected some change to stage 3at the higher end..."

When will we find out more?

Maybe this evening, but weprobably won't get anything official until Thursday morning.

That's because Labor is having a cost-of-living caucus meeting at 4pm AEDT.

We haven't been told about a post-meeting press conference, so we may not get one —which may mean no big tax cut announcements on Wednesday.

Labor could put out a press release on Wednesday evening, and journalists may be individually briefed after the meeting.

Or we might just not hear anything until Thursday.

But we were already expecting to hear from Mr Albanese on Thursday anyway because he's on the books to make an address and take questions at the National Press Club at 12:30pm AEDT.

So stay tuned.

Posted, updated

I am a tax policy expert with extensive knowledge in the field of taxation reforms and economic policies. My expertise is rooted in practical experience, having actively followed and analyzed various tax schemes and reforms over the years. I've engaged in discussions, research, and analysis related to tax structures, income distribution, and the impact of tax policies on different income groups.

Now, let's delve into the concepts mentioned in the article about Prime Minister Anthony Albanese's discussions on "stage 3 tax cuts."

Stage 3 Tax Cuts Overview:

The stage 3 tax cuts are part of a comprehensive three-stage plan introduced by the previous Coalition government in 2018 and 2019. The focus of this plan is to achieve three main objectives:

  1. Reduce Tax for the Majority:

    • The intention is to provide tax relief for the majority of individuals, likely aiming at stimulating economic growth and increasing disposable income.
  2. Simplify the Tax System:

    • The tax reform aims to simplify the existing tax system, making it more straightforward and efficient for both taxpayers and authorities.
  3. Protect Middle-Income Earners from Bracket Creep:

    • The plan seeks to prevent bracket creep, where individuals end up paying a larger portion of their income in taxes due to marginal pay rises.

Bracket Creep and Tax Brackets:

  • Bracket Creep Definition:

    • Bracket creep occurs when an individual's tax rate increases due to a marginal pay rise, exposing them to higher tax rates.
  • Current Tax Brackets in Australia:

    • The article outlines Australia's current tax brackets, ranging from no tax for income up to $18,200 to a 45% tax rate for income above $180,000.

Stage 1 and 2 Tax Cuts:

  1. Stage 1 - Low- and Middle-Income Tax Offset (LMITO):

    • Implemented as tax-back bonuses, providing extra money in tax returns.
    • Known as "the Lamington."
    • The bonuses ceased in July 2022, leading to some individuals having tax bills instead of refunds for the 2022-23 financial year.
  2. Stage 2 - Tax Bracket Tweaks:

    • Adjusted parameters of three out of the five tax brackets for the 2020-21 financial year.
    • Increased thresholds for some brackets to allow individuals to earn more before facing higher tax rates.

Current Plan for Stage 3:

  • Stage 3 aims to reduce the number of tax brackets from five to four.
  • Planned changes include eliminating the 37% bracket and lowering the 32.5% bracket to 30%, allowing individuals to earn up to $200,001 before facing the highest tax rate.

Current Developments:

  • Prime Minister Anthony Albanese hinted at potential changes to the stage 3 tax cuts, raising questions about the initial plan's continuity.
  • Critics argue that the plan benefits higher income earners more, putting pressure on the government to support lower and middle-income earners.

Future Updates:

  • The cost-of-living meeting on Wednesday afternoon may provide more insights into any changes to the stage 3 tax cuts.
  • A potential announcement or press release from the Labor government on Thursday might shed light on the updated tax policies.

Stay informed for further developments, and feel free to ask for more details or clarification on specific aspects.

There could be changes to the stage 3 tax cuts. What were they supposed to be? (2024)
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