On 25 January 2024, the Albanese government announced it would scale back the previously legislated “Stage 3 tax cuts” due to commence on 1 July 2024 such that the benefit of that tax cut to be received by those on the highest income brackets would be halved and more of the benefit would be passed to lower and middle- income earners.

Anthony Albanese stated in his media release on 25 January 20241 :

Scott Morrison’s tax plan was designed five years ago, before the pandemic, before the global inflation spike, before interest rate rises and greater global uncertainty. It doesn’t do enough to help those who’ve been put under the most pressure by these changing circumstances.

We have found a more responsible way to ensure more people get a bigger tax cut to help ease the pressure they are under.

This was a major backflip by the Albanese government which had previously stated it was fully committed to the passage of the Stage 3 tax cuts as previously legislated.

After about a month of parliamentary debate, the amending legislation to scale back the Stage 3 tax cuts is now law, having passed parliament on 27 February 2024 and received assent on 5 March 2024.

Previously legislated Stage 3 tax cuts

Under the previously enacted Stage 3 tax cuts, the 37% tax rate for middle-income earners was to be abolished. Instead, a 30% rate was to apply to an individual’s income between $45,001 and $200,000 and a 45% rate to income over $200,000 (plus the 2% Medicare Levy where applicable).

Had those cuts taken effect, from 1 July 2024 onwards:

• a person earning over $200,000 p.a. would have paid $9,075 less tax annually.

• a person earning $100,000 p.a. would have paid $1,375 less tax annually.

• a person earning $50,000 p.a. would only have paid $125 less tax annually.

New legislated Stage 3 tax cuts

The revised individual resident tax rates that will now apply from 1 July 2024 onwards will be as follows:

The key changes from the current (2024) income tax rates are:

• a reduction from the 19% tax rate to 16% for incomes between $18,200 and $45,000

• a reduction of the 32.5% tax rate to 30% for incomes between $45,000 and a higher $135,000 threshold

• an increase to the threshold at which the 37% tax rate applies from $120,000 to $135,000.

• an increase in the threshold at which the 45% tax rate applies from $180,000 to $190,000.

By comparison, from 1 July 2024 onwards:

• a person earning over $200,00 p.a. will pay $4,529 less tax annually - they are $4,546 worse off.

• a person earning $100,000 p.a. will pay $2,179 less tax annually – they are $804 better off.

• a person earning $50,000 p.a. will pay $929 less tax annually - they are $929 better off.

Whilst lower and middle-income Australian earners will no doubt welcome the increased benefits they will receive under the revised stage 3 tax cuts from 1 July 2024 onwards, some of the highest-income earners may be disappointed that they won’t be receiving the full benefits they may have anticipated from that tax cut stage as originally enacted.

Common tax-reducing strategies for high-income earners

Higher-income earners may now be more motivated than before to find ways to reduce their tax bill. Common strategies in this regard might include:

Negatively geared investments

A “negatively geared investment” is broadly an investment that produces an annual income less than its costs and as such generates a “loss”. The tax rules will generally allow the taxpayer to claim that annual loss as a deduction against other assessable income. The ultimate “capital gain” made on the realisation of such investments may then attract concessional taxation treatment under the Capital Gains Tax rules and is often the motivating factor to make a negatively geared investment.

Real estate and shares remain the most popular investment options for negative gearing in Australia.

Salary packaging

Salary packaging involves an arrangement between an employer and employee whereby the employee is remunerated in part by the provision of non-cash benefits in lieu of cash salary. Salary packaging may be tax effective when the tax rate applies on the provision of the non-cash benefit is less than the tax the employee would otherwise receive the equivalent valueof the benefit in the form of cash salary.

Cars for personal use remain the most common item that are provided under salary packaging arrangements. Employees who work for certain types of tax-exempt employers may be in a position to tax effectively salary package more types and amounts of benefits.

Making additional tax-deductible superannuation contributions

Individual taxpayers can claim a tax deduction for amounts they personally contribute to their superfund by making “concessional contributions”. There is a limit to the amount of such contributions each year, referred to as the “concessional contributions cap” which is set at $27,500 for the 2023/24 income year, but will increase to $30,000 for the 2024/25 income year. Although some taxpayers can utilise concessional cap amounts not utilised in prior years.

A high earning taxpayer may obtain a tax deduction at a rate of up to 47.5% in respect of such super contributions but may only pay contributions tax at the fund level of 15%, thus generating a potential immediate tax arbitrage benefit of 32.5%.

Note that the compulsory superannuation contribution amounts paid by employers of salary and wage earners on behalf of their employees will already count towards their annual concessional contribution cap amount.

Other ways to reduce personal tax

• Salary and wage earners may be entitled to a range of personal tax deductions for work related expenditure, such as travel costs, car expenses, subscription costs, or uniform costs.

• Investors can generally claim tax deductions for non-capital costs relating to holding investments such as interest or repairs and maintenance costs.

• Business operators can generally claim tax deductions for most expenditure relating to their business. They may also be entitled to additional tax deductions or concessions that are not otherwise available to non-business operators, particularly if they are a smaller business operator.

Individual taxpayers should receive advice from their tax agents to ensure that they maximise the tax annual personal deductions they are entitled to.

Further tax planning options for business owners or investors

Higher-income earners who derive income from business or investment activity (rather than salary and wage income) may have further options to structure their affairs such that they limit the tax rate they pay on their earnings to less than the current top rate of 47% (including the Medicare Levy) that will now apply to earnings above $190,000 from 1 July 2024.

Such higher-income earners may consider:

• The use of private companies to shelter tax rates at either 25% or 30% (depending on the profile of the income).

• The use of family discretionary trusts to “split” income to a range of family beneficiaries thereby utilising multiple marginal tax relief brackets.

• Increase investment in superannuation. Income earned in superannuation funds will generally be taxed at a maximum rate of 15% during the “accumulation phase” and is later tax-free after retirement age is reached, subject to limits.

Join us on 17 April 2024 at 12pm ACST to learn more about the revised Stage 3 tax cuts, how they may impact you, and what you can consider regarding your taxable income for the next financial year.

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Disclaimer:

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Group Limited.

This article contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.

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