Stage 3 Tax Cuts Explained: What They Mean for Your Wallet

The Stage 3 tax cuts represented one of the most significant changes to Australia's tax system in years. Implemented on 1 July 2024, these reforms reshaped how Australians are taxed on their income. Whether you earn $30,000 or $200,000, these changes have affected your take-home pay. This guide explains everything you need to know about how these cuts work and what they mean for your financial situation.

The History Behind Stage 3 Tax Cuts

The Stage 3 tax cuts were originally legislated in 2019 as part of a three-stage tax reform package. Stages 1 and 2 were implemented in 2018 and 2020 respectively, with Stage 3 scheduled to take effect from 1 July 2024. The original plan was designed to simplify the tax system by flattening the structure, with the intention of having one rate of 30% for everyone earning between $45,000 and $200,000.

However, in early 2024, the federal government announced significant modifications to the original Stage 3 plans. The revised version was designed to provide more equitable benefits across all income levels, with a particular focus on delivering greater tax relief to low and middle-income earners who had been struggling with cost-of-living pressures.

What Changed Under the Revised Stage 3 Cuts

The modified Stage 3 tax cuts introduced several key changes that differentiated them from the original proposal. Understanding these changes is essential for knowing how they affect your specific income level.

The 19% marginal tax rate was reduced to 16% for incomes between $18,201 and $45,000. This change benefited every taxpayer earning above the tax-free threshold, providing a base level of tax relief regardless of income. The reduction from 19% to 16% translates to savings of approximately $804 per year for anyone earning $45,000 or above.

The 32.5% marginal rate was reduced to 30% for incomes between $45,001 and $135,000. This was particularly beneficial for middle-income earners, who represent the bulk of Australian taxpayers. Someone earning $100,000 would see substantial savings from this change alone.

The 37% tax bracket threshold was increased from $120,000 to $135,000. This meant that an additional $15,000 of income for higher earners would be taxed at 30% rather than 37%, providing further relief to those in this income range.

How Much Will You Save?

The amount you save under the Stage 3 tax cuts depends on your income level. Here is a breakdown of approximate annual savings at various income levels compared to the pre-July 2024 tax rates.

Someone earning $40,000 per year saves approximately $654 annually. At $60,000, the annual savings increase to around $1,179. For those earning $80,000, savings are approximately $1,679. An income of $100,000 results in savings of about $2,179 per year. At $120,000, you can expect savings of around $2,679, while someone earning $150,000 saves approximately $3,729 annually.

These figures represent the reduction in income tax only and do not include the Medicare levy, which remains at 2% of taxable income for most taxpayers. To see your exact savings, use our free Australian tax calculator which shows you detailed breakdowns of your tax liability.

Impact on Different Income Groups

The revised Stage 3 cuts were specifically designed to address concerns that the original proposal disproportionately benefited high-income earners. Let us examine how different groups are affected.

Low-income earners (below $45,000) benefit primarily from the reduction of the 19% rate to 16%. While the absolute dollar savings are smaller than for higher earners, the percentage reduction in tax paid is significant. For someone earning $35,000, the tax cut represents a meaningful increase in disposable income that can help with rising living costs.

Middle-income earners ($45,000 to $135,000) receive the most substantial benefits proportionally. This group gains from both the 16% rate and the reduced 30% rate. The sweet spot is around $135,000, where you maximise the benefit from the reduced 30% bracket before hitting the 37% rate.

High-income earners (above $135,000) still receive tax cuts, though the proportional benefit is less than for middle-income earners. The raised threshold for the 37% bracket provides additional relief, and everyone benefits from the lower rates in the brackets below their marginal rate.

Comparing Old vs New Tax Rates

To fully understand the impact of Stage 3, it helps to compare the old and new tax structures side by side. Before July 2024, the rates were 19% for $18,201 to $45,000, 32.5% for $45,001 to $120,000, 37% for $120,001 to $180,000, and 45% above $180,000.

After Stage 3, the rates became 16% for $18,201 to $45,000, 30% for $45,001 to $135,000, 37% for $135,001 to $190,000, and 45% above $190,000. The tax-free threshold remained unchanged at $18,200, and the top marginal rate of 45% was retained but now only applies to income above $190,000.

What This Means for Your Take-Home Pay

The practical impact of Stage 3 is most visible in your regular pay packet. If you are paid weekly, fortnightly, or monthly, your employer adjusts your tax withholding to reflect the new rates. This means you have been receiving more in your take-home pay since July 2024.

For someone earning $80,000 per year paid fortnightly, the Stage 3 cuts translate to approximately $64.58 extra per fortnight after tax. While this might not sound transformative, it adds up to over $1,679 per year, which can make a meaningful difference for household budgets.

Planning Ahead with the New Tax Rates

Understanding the new tax structure helps with financial planning. Here are some considerations for making the most of your tax situation under Stage 3.

If you are close to a bracket threshold, small changes in your taxable income can have disproportionate effects. For example, if you earn $133,000, earning an additional $3,000 (pushing you to $136,000) means that extra $1,000 above $135,000 would be taxed at 37% rather than 30%. Salary sacrificing into superannuation could help manage this.

The flat 30% rate across a wide income band ($45,001 to $135,000) simplifies planning for many middle-income earners. There is no advantage to timing income within this band, as it is all taxed at the same rate.

Conclusion

The Stage 3 tax cuts have reshaped Australia's personal income tax landscape, delivering benefits to taxpayers across the income spectrum. While the absolute dollar savings are higher for those with larger incomes, the revised cuts ensured that low and middle-income earners received meaningful relief when they needed it most.

To see exactly how Stage 3 has affected your personal tax situation, try our Australian tax calculator. It is updated with all current tax rates and will show you precisely how much tax you owe and what your take-home pay looks like under the current system.