There have been many news stories lately about the 'stage three' tax cuts that are anticipated to come into effect from 1 July 2024. Whatever your view, it's likely these cuts will go ahead, so it's a good idea to understand exactly what’s going to happen.
How does income tax work?
Income tax in Australia can feel a little complicated and isn’t something we tend to investigate too much in our own time (unless it’s tax time and we’re trying to find as many deductions as possible).
The current tax setup sits in five tax brackets:
- 0 - $18,200: 0%
- $18,201 - $45,000: 19% (19 cents for each dollar)
- $45,001 - $120,000: 32.5% (32.5 cents for each dollar)
- $120,001 - $180,000: 37% (37 cents for each dollar)
- $180,001 and over: 45% (45 cents for each dollar)
The tax you pay is based on the amount of your income that falls into each of these brackets. The more you earn, the more tiers your salary is taxed at.
For example, a person earning $80,000 a year on the current tax rates will be taxed at:
- $0 for their first $18,200 (0% tax threshold)
- $5,092 for their income between $18,001 and $45,000 (19% tax threshold)
- $11,375 for their income between $45,001 and $80,000 (32.5% tax threshold)
Over the course of a financial year, they could expect to pay $16,467 in income tax (not including the Medicare levy). Even though $80,000 sits in the 32.5% bracket, they are only paying 20.5% of their salary in tax.
If we do the same math for someone earning $200,000, they will end up paying around $60,667, or around 30.3% of their income.
Try our tax calculator here.
What’s happening on 1 July?
From 1 July 2024, the Australian Government is proposing that:
- the 19% tax rate will reduce to 16% (for incomes between $18,200 and $45,000).
- the 32.5% tax rate will reduce to 30% (for incomes between $45,000 and the new $135,000 threshold).
- the threshold at which the 37% tax rate applies will be increased from $120,000 to $135,000.
- the threshold at which the 45% tax rate applies will be increased from $180,000 to $190,000.
What will the outcome of these changes be?
That is the million-dollar question, and the answer depends on who you ask. On the surface, a fair amount of people will be paying less income tax. But it also looks like the Government will be getting less taxpayer money, which could potentially affect future budgets. Increasing the amount of money in our pockets could lead to more spending, which could affect how long it takes for inflation and interest rates to lower.
