Stage-three tax cuts: Aussies celebrate, but SMEs face paperwork trouble

People in Australia making less than $150,000 will see positive changes in their taxes starting July. The government has given the green light to modify the tax code, especially benefiting those earning below $45,000.

This adjustment, initially excluded in the previous government’s tax cuts, will now help over a million Australians. It ensures that individuals with lower incomes either maintain a lower tax rate or are exempt from the Medicare levy. Despite the positive implications for individual taxpayers, there is a potential downside that may affect small businesses and their advisors.

The adjustments to Stage 3 income tax cuts could introduce subtle but significant compliance costs. This implies that small businesses may encounter additional administrative burdens and complexities in adapting to the altered tax landscape. As a result, business owners and their advisors will need to navigate and address these compliance challenges effectively to ensure a smooth transition and continued financial stability for SMEs.

Breakdown of stage-three tax cuts

From 1 July 2024, the Albanese Labor Government will:

Reduce the 19 per cent tax rate to 16 per cent (for incomes between $18,200 and $45,000).

Reduce the 32.5 per cent tax rate to 30 per cent (for incomes between $45,000 and the new $135,000 threshold).

Increase the threshold at which the 37 per cent tax rate applies from $120,000 to $135,000.

Increase the threshold at which the 45 per cent tax rate applies from $180,000 to $190,000.

As a result of these changes, on July 1:

All 13.6 million taxpayers will receive a tax cut – and 2.9 million more taxpayers will receive a tax cut compared to Morrison’s plan.

11.5 million taxpayers (84 per cent of taxpayers) will now receive a bigger tax cut compared to Morrison’s plan.

5.8 million women (90 per cent of women taxpayers) will now receive a bigger tax cut compared to Morrison’s plan.

A person on an average income of around $73,000 will get a tax cut of $1,504 – that’s $804 more than they were going to receive under Morrison’s plan.

A person earning $40,000 will get a tax cut of $654 – compared to nothing under Morrison’s plan.

A person earning $100,000 will get a tax cut of $2,179 – $804 more than they would receive under Morrison’s plan.

A person earning $200,000 will still get a tax cut, which will be $4,529.

In addition, the Government will increase the Medicare levy low-income thresholds for 2023-24.

Tax changes criticized for insufficient focus on productivity

Innes Willox, Chief Executive of Ai Group, expressed disappointment in the Australian Government’s recently announced tax scale adjustments. Willox argued that the changes fail to address the country’s persistent low productivity growth, claiming that they provide minimal incentives for investment, employment, and savings.

“The changes to the legislated tax scales announced by the Government today once again demonstrate that the Government attaches little weight to addressing the problems created by Australia’s endemic low productivity growth,” Innes Willox, Chief Executive of the national employer association Ai Group said today. “The Government’s new tax scales will barely touch the sides on improving incentives to invest, employ and save. As with its workplace relations changes, the new tax scale will detract from the productivity improvement imperative that features in the Government’s rhetoric but sadly not in its actions. 

“The legislated complete removal of the 37 per cent tax rate, which has now been abandoned, would have provided a significant boost to productivity, living standards and the tax base. “Further, sharply reducing the difference between the personal and company tax rates, as had been legislated, would have seen effort redirected towards business (and employment) expansion rather than on juggling between personal and business tax structures. This would have been particularly important for small and family-owned businesses and for the wealth they generate. 

“The Government’s decision to walk away from its commitment to this important tax reform will undoubtedly undermine the ability to deliver on more fundamental tax reform in the future. As evident in the Government’s own 2023 Intergenerational Report, such reform is clearly needed if we are to successfully meet our growing fiscal challenges. 

“Major tax reform needs much more than short-term ad hoc measures. It requires a consistent, far reaching, long-term focus on phased changes to keep Australia more competitive and Australians more incentivised to invest, work and save,” Mr Willox said.

The changes to the personal income tax system will have a net cost of $1.3 billion over the forward estimates. The total impact of these tax cuts is expected to be $107 billion over the forward estimates.

The increase to the Medicare levy low-income thresholds is expected to cost $640 million over four years from 2023-24. This was accounted for in the 2023-24 Mid-Year Economic and Fiscal Outlook.

To find out how much the Government’s tax cuts will benefit you, use the calculator on the Treasury website: Tax cut calculator.

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