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Are the Stage 3 tax cuts fair (and will they happen)?
On January 15, Prime Minister Anthony Albanese said the Stage 3 tax cuts were here to stay despite Labor’s consistent reservations, according to the Australian Associated Press.
Since then, the conversation has swirled about the fairness of the Stage 3 tax cuts, which is set to cost the government $313 billion over 10 years.
By January 22, one media outlet had claimed that the tax cuts were not going ahead as planned – although at the time of writing, there has been no changes to the Stage 3 tax cuts.
With the $1,500 tax offset ending this financial year, many workers that earn under the Australian average annual salary of $90,000 will be worse off in net terms despite the tax break.
In a cost-of-living crisis, the fact that someone earning $200,000 receives a $9,075 tax break while someone earning $40,000 gets no immediate benefit can feel unfair.
Others have made the case that the tax overhaul could save $130 billion off the total bill if it were reweighted towards lower income earners.
However, the reason Australia’s middle- and higher-income earners are set to receive the major tax breaks is because they bear the larger share of the tax burden, according to property expert Ben Kingsley.
“And so they should, but how much is too much?” said Kingsley, founder and director of Empower Wealth, which was recently named Liberty Australian Brokerage of the Year at the 2023 Australian Mortgage Awards.
“Squaring up the ledger a bit whilst also addressing bracket creep is a fairer outcome.”
For example, Kingsley said someone earning $70,000, currently paid $13,217 in taxes. Now double their income to $140,000. Their tax bill jumps to $36,867 – that’s 179% more than the lower earner, not just double.
With the new Stage 3 cuts, that number falls to 166% higher – ($12,592 compared to $33,592).
Watson agreed, “I think for most Australians, the tax cuts have been enacted to provide improved equality for everyday Australians, particularly for ‘middle Australia’ who do a lot of our country’s heavy lifting.”
What are the Stage 3 tax cuts?
The Stage 3 tax cuts are the final part of a three-phased tax reform plan legislated in 2019 and are set to come into effect for the 2024/25 income year.
It involves changes to personal income tax brackets, primarily affecting earners between $45,000 and $200,000.
There will be two key changes:
- Merging tax brackets: The existing 32.5% and 37% tax brackets will be merged into a single 30% bracket for those earning between $45,001 and $120,000.
- Raising the top tax threshold: The 45% tax bracket will start at $200,000 instead of $180,000.
What does all this mean for borrowing capacity?
In terms of borrowing capacity, prospective homebuyers will likely be the ones to benefit the most.
Borrowing power could increase by $15,000 for someone with $100,000 annual income and around $100,000 for someone on a $200,000 income – and that’s assuming APRA still leaves the buffer rate at 3% on lending servicing.
“Borrowing powers are based on your net income,”
“Banks subtract your expenses, and then lend to you based on your leftover income available. These tax cuts directly increase the leftover income. The higher your income, the larger the boost to your borrowing power is.”
“For the rare households with two income earners above $200,000, there’s potentially a $200,000 increase coming your way.”