Personal Tax Cuts – Stage 3

Author: Tony Rule, Partner, TAG Financial Services

New Tax Rates

On Tuesday last week, the Federal Parliament passed legislation to formalise the third and final stage of personal tax cuts. Tax cuts in earlier years had given tax relief to lower income tax earners and the third stage was originally planned to give tax cuts to higher income earning Australians.

The final version of the stage 3 tax cuts have provided further benefits to middle income earners and the benefit to higher income earners is now slightly less than the original stage 3 announcements. The change in tax rates apply to income earned from 1 July 2024 onwards.

In summary, the changes are as follows:
• The 19% tax rate reduces to 16%.
• The 32.5% tax rate reduces to 30%.
• The 37% threshold increases from $120,000 to $135,000.
• The 45% threshold increases from $180,000 to $190,000.

The impact of these changes are as follows:
• There is no change for nil or low income earners – the existing tax-free threshold of $18,200 for adults (and $416 for minors) remains the same.
• Taxpayers earning $45,000 per year will have a tax saving of $804 (or 1.8%) – which was originally planned to not change under stage 3.
• Taxpayers earning $135,000 per year will have a tax saving of $3,729 (or 2.8%).
• Taxpayers earning $190,000 per year will have a tax saving of $4,529 (or 2.4%).
• Taxpayers earning over $190,000 will have a fixed tax saving of $4,529.

Tax Considerations – Business Owners & Trusts

The reduction in individual tax rates particularly for higher earning individuals are welcomed – particularly on the back of the stage 1 and 2 cuts for lower income individuals.

Under the new tax rates, the average rate of tax for an individual earning $130,000 per year is 24.9% (including Medicare). Where annual profits of more than $130,000 are being generated in a company environment (or $260,000 where a couple are involved), consideration should be given to utilising a holding company to receive dividends from trading companies and then to invest on an owner’s behalf. Such a strategy would provide a safe environment for retained earnings to be held (away from trading company and directorship risks) and income on investments would be taxed at 25% – which compares favourably to the top individual marginal tax rate that is still 45% (plus 2% Medicare). Obviously, your particular situation needs to be taken into account (including all potential costs and benefits) before making such a change.

In addition to changes in individual tax rates, careful consideration needs to be given to distributions of income out of family or discretionary trusts to family members. In particular, the new interpretation of Section 100A by the Australian Taxation Office needs to be taken in account which requires “distributions” of income to family members out of trusts to be backed up with “payments” to those family members so that the tax and financial implications of the distribution are matching.

Tax Planning

The importance of careful tax planning is more relevant now than it has ever been but cannot be considered in isolation. Other important matters to be considered include minimisation of trading and directorship risk, ensuring appropriate asset protection, consideration of succession planning and providing for your retirement.

More information

If you have any questions, feel free to get in touch with us on 03 9886 0800 or drop us an email. We’re here to help you make the most of your financial future.

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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2024. Please do not reproduce without the expressed written consent of the author.