In recent years, the Australian government has implemented significant tax reforms aimed at providing cost of living relief to taxpayers. One such reform is the stage 3 tax cuts, which are set to come into effect on 1 July 2024. These changes will amend personal income tax rates and thresholds, offering tax relief for all income earners. Let's explore the upcoming tax changes and discuss how you can utilise them to your advantage.
Understanding the stage 3 tax cuts
The stage 3 tax cuts were initially introduced as part of the government's seven-year personal income tax plan in the 2018/19 Federal Budget. These measures were subsequently legislated and further revised in subsequent years. The key change in the upcoming tax cuts is the replacement of marginal tax rates for taxable income from $45,000 to $200,000 with a flat 30% marginal tax rate.
Changes for Australian tax residents
The new stage 3 tax cuts will bring about several changes to tax rates and thresholds in the 2024/25 financial year compared to the current year (2023/24). These changes include:
- Reducing the current 19% tax rate to 16%
- Reducing the current 32.5% tax rate to 30%
- Increasing the threshold above which the 37% tax rate applies from $120,000 to $135,000
- Increasing the threshold above which the 45% tax rate applies from $180,000 to $190,000
It's important to note there is no change to the Medicare levy, currently set at 2%.
Below is a table comparing resident tax rates for this current financial year 2023/24 to the new rates for 2024/25 and future years:
| 2023/24 (current year) |
2024/25 and future years |
||
| Thresholds ($) | Rates (%)* | Thresholds ($) | Rates (%)* |
| 0 — 18,200 | 0 | 0 — 18,200 | 0 |
| 18,201 — 45,000 | 19 | 18,201 — 45,000 | 16 |
| 45,001 — 120,000 | 32.5 | 45,001 — 135,000 | 30 |
| 120,001 — 180,000 | 37 | 135,001 to 190,000 | 37 |
| Over 180,000 | 45 | Over 190,000 | 45 |
*Income tax rates only, Medicare not included.
To understand your potential tax saving, the below table provides examples based on different levels taxable income for Australian residents.
Tax savings under the new rates compared to the current year's tax rates:
| Taxable Income | Income tax payable* | Tax saving | |
| 2023/24 - Current year | 2024/25 onwards | ||
| $30,000 | $1,542 | $1,118 | $354 |
| 45,000 | $4,767 | $3,963 | $804 |
| $70,000 | $13,217 | $11,788 | $1,429 |
| $100,000 | $22,967 | $20,788 | $2,179 |
| $135,000 | $35,017 | $31,288 | $3,729 |
| $150,000 | $40,567 | $36,838 | $3,729 |
| $190,000 | $56,167 | $51,638 | $4,529 |
*Medicare levy not included
How can you utilise the change
Now you understand the changes, here are some ways you can utilise the changes for your benefit:
- Extra disposable income in future years: With the upcoming tax cuts, individuals with taxable income lower than approximately $146,500 will receive a higher tax cut. This means that more people will have extra disposable income from 2024/25. It may be a good time to consider contributing more to superannuation or paying down non-deductible debt, such as a home loan.
- Reviewing salary sacrifice or personal deductible contributions strategies: The reduction in the lowest tax rate from 19% to 16% will impact the effectiveness of salary sacrifice or personal deductible contributions strategies for individuals with lower taxable income. It's crucial to review existing strategies to ensure that taxable income is not reduced below the increased effective tax-free threshold. Additionally, individuals with taxable income between their effective tax-free threshold and $45,000 will only save up to 3% tax by utilising these strategies, compared to the current 6% tax saving.
- Deferring income to a future financial year: The reduction in lower tax rates and increases in tax thresholds make it beneficial to delay certain events that can result in higher taxable income. By postponing retirement, deferring a capital gains tax event, or delaying a First Home Super Saver (FHSS) scheme release, individuals can take advantage of lower tax liabilities in future financial years.
The upcoming tax changes present an opportunity for individuals to optimise their financial strategies. By understanding the revised tax rates and thresholds, you can make informed decisions regarding superannuation contributions, debt repayment, and income deferral. It's essential to consult with a financial advisor to tailor these strategies to individual circumstances and ensure maximum benefit from the upcoming tax changes.
How Gallagher can help
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