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The Third Stage of Tax Cuts: What Are They, How Do They Work, and Why Do They Exist? | News Australia

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The third stage tax cut, due to come into effect in July 2024, is the third stage of the Morrison government’s tax plan.

The law was passed with the support of Labor in 2019, despite the party’s reservations, and Anthony Albanese went to the polls in 2022 not promising any change to what was legislated. Treasurer Jim Chalmers has since said the government’s stance on tax cuts has not changed.

But the Albanian government has left open the prospect of amending the tax cuts, with Chalmers repeatedly stressing that global economic conditions have changed and with them Australia’s economic outlook, with inflation rising, public debt higher and the future highly uncertain.

While the fate of the Phase 3 builds remains uncertain, here’s what we know about them and how they might affect you.

What was the Morrison government’s tax plan?

The tax plan for 2019 consisted of three stages.

The first stage was the Low and Medium Income Tax Credit (Lmito) of up to $1,080 a year for taxpayers earning between $30,000 and $126,000.

Stage two, which was brought forward from 2022 to 2020, when Lmito was extended for another two years, increased the 32.5% marginal tax bracket from $37,001 to $90,000 to $45,001 to $120,000, and the threshold if the rate the 37% tax was raised from $90,000 to $120,000. The existing Low Income Tax Credit was also increased to include those earning less than $45,000.

Stage three completely abolishes the 37% marginal tax and reduces the 32.5% to 30%. It also raises the threshold for the 45% marginal tax rate, meaning anyone earning between $45,000 and $200,000 will pay the same 30% tax rate.

Australia’s tax brackets are currently as follows:

  • up to $18,200 – tax free

  • $18,201 to $45,000 – Pay a 19% tax rate.

  • $45,001 to $120,000 – Pay a tax rate of 32.5%.

  • $120,001 to $180,000 – Pay a 37% tax rate.

  • $180,001 plus – pay 45% tax.

At the third stage, the tax categories will look like this:

  • $18,200 – no tax

  • $18,201 to $45,000 – Pay a 19% tax rate.

  • Between $45,001 and $200,000 – Pay tax at a rate of 30%.

  • $200,001 plus – pay 45% tax.

The marginal tax rate is how much tax you pay on income in that bracket. For example, if you earn $97,000, in a third state you will pay no tax on the first $18,200 you earn, 19% on every dollar between $18,001 and $45,000, and 30% on every dollar between $45,001 and $97,000.

Why were the changes made?

It was a different world – before the pandemic and before the war in Ukraine, and before the pressures on energy, supply chains and inflation that we are experiencing now.

The Coalition looked to achieve his long-awaited “return to the black” budget and wanted to stimulate the economy through tax cuts. He also wanted to address “bracket creep”, which the coalition has opposed since 2015.

“Securing future tax cuts now will give Australians confidence that they will be rewarded for their hard work and it will help protect their future pay rises from creep,” Treasurer Josh Frydenberg said at the time. told parliament in 2019.

What is bracket creep?

A creeping bracket is when an increase in wages causes people to pay more of their income in tax, as taxpayers “creep” over time through the tax brackets described above.

Tax brackets are not automatically adjusted for inflation. Therefore, when a person’s salary increases, his average the tax rate increases because most of their pay is in their highest tax bracket.

And from time to time, some of their income moves into the next tax bracket, being taxed at a higher rate.

In an economy where average incomes are generally rising and tax brackets are fixed, bracket creep is inevitable.

So is stage three a good thing?

There have been many, many arguments in favor of addressing the number of tax brackets in Australia’s personal income tax system, including increasing and decreasing the thresholds for each bracket.

But the tax brackets are still fixed. The third-stage cuts only really fix creep into the bracket for top earners, whose marginal tax rates will drop from current levels. For people earning less than $120,000 – which is about 90% of Australian taxpayers – the creeping bracket will continue to be an issue.

A analysis of the parliamentary budget found that a person earning $49,000 would see their average tax rate increase by 5.9% over the next decade, while the third round of tax cuts would reduce their marginal tax by just 0.9%. Someone making more than $120,000 will see their bracket creep reversed by a tax cut.

No government since the Fraser government in the 1970s has seriously considered indexing tax brackets to inflation, despite the nominal increase in pay packets it would produce. why? Because the sliding bracket can help the government restore the budget without having to do anything (which is one of the reasons the Fraser government abandoned indexation shortly after it was introduced).

Bracket creep can help close fiscal gaps without cutting services or raising taxes. The average income tax rate increases imperceptibly to people, which means that governments collect additional income tax, improving the budget’s income. Even with the third stage.

What about spending on the budget?

The third phase of tax cuts is estimated to cost the budget $243 billion in lost tax revenue over the decade after they are enacted.

https://www.theguardian.com/australia-news/2022/oct/09/the-stage-three-tax-cuts-what-are-they-how-do-they-work-and-why-do-they-exist

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