Planning Opportunities ahead of the Stage 3 Tax Cuts

Michelle Bromley CFP®

Director – Strategy, Advice & Training

In response to the evolving landscape of Australia's economic policies, Prime Minister Anthony Albanese recently announced proposed amendments to the Stage Three Tax Cuts legislated to commence from 1 July 2024.While these amendments are yet to be tabled in Parliament and face the crucial journey of passing through both houses, they signify a potential shift in the government's approach. But what does this mean for our clients, and how can you use the tax cuts to your advantage?

With rising inflation and higher interest rates than had been seen for a decade, taxpayers will surely welcome this final stage of the tax reforms aimed at addressing the phenomenon of ‘bracket creep’ as many Australians receiving wage increases are pushed into higher tax brackets, resulting in a de facto tax increase and resulting reduction in purchasing power.

Addressing bracket creep puts more disposable income into the hands of consumers, with an expected resulting increase in consumer spending to boost the economy. Critics buzz that tax cuts may not be good policy at a time when the Government is managing a challenging inflationary environment; however, the Reserve Bank and Treasury have already factored these tax cuts into their inflation forecasts.  

While the stage one and two cuts benefited lower income earners, the original stage 3 cuts were to provide greater benefits for those earning middle and higher incomes and therefore paying more tax.

The amendments redistribute some of this benefit away from higher income earners and down to those on lower tax brackets which the Government believes will better address cost of living pressures without adding to inflationary pressures.

Commencing in 2018, the Stage 1 and 2 tax cuts increased the upper thresholds of the 19% and 32.5% brackets along with an increase in theLow Income Tax Offset.

The Amended Stage 3 Tax Cuts are proposed to be delivered by lowering the 19% and 32.5% tax rates to 16% and 30% respectively, and increasing the minimum income threshold for the 37% bracket to $135,000 and the 45% bracket to $190,000.

Current Personal Income Tax Rates and Thresholds

Amended Personal Income Tax Rates and Thresholds from1 July 2024 under ‘Stage 3 Tax Cuts’

The main benefit of the tax cuts is additional disposable income for taxpayers earning $40,000pa or more. Beyond a taxable income of $190,000 there is no additional benefit as each dollar is taxed at 45%.

Lets look at a few ways to unlock the potential benefits of these tax cuts.

To take full advantage of the tax cuts, taxpayers may want to delay tax events such as selling Capital Gains Taxed assets or postponing their retirement date and hence any retirement termination payments into the2025 financial year, as they may pay less tax in a financial year where their marginal tax rate is lower.

The downside to lower tax is that is reduces the value of future tax deductions. Taxpayers should consider opportunities to bring forward tax deductions into the current financial year where possible, some ideas:

• Make Catchup Concessional Contributions: Eligible individuals with a Total Superannuation Balance as at 30 June 2023 of less than$500,000 can potentially make an extra personal concessional contribution before 30 June 2024, by applying available unused concessional cap amounts carried forward from the previous 5 financial years.

• Make Bring-Forward Concessional Contribution using a Reserve: SMSF members may take advantage of a tax deduction in FY2024 for bringing forward their FY 2025 personal concessional contribution to be made in June 2024, using an ‘unallocated contributions reserve’ to apply up to $27,500 of the contribution in July 2024 (this does mean you miss out on contributing & claiming a deduction in FY 2025).

• Pre-pay tax deductible expenses: Pre-pay employment expenses, e.g. professional memberships, and expenses related to the generation of investment income e.g. you can pre-pay up to 12 months of interest on an investment loan or bring forward maintenance costs on an investment property.

In conclusion, clients are advised to proactively consider strategic financial planning opportunities ahead of the Stage 3 Tax Cuts commencing on 1 July 2024. Exploring opportunities to bring forward deductions into the current financial year, or to defer taxable income into financial year2025 can potentially maximise tax benefits. While the tax cuts aim to combat ‘bracket creep’, concerns linger around inflationary consequences.Implementation of tax planning strategies should be approached cautiously, inconsideration that the Government does still have opportunity to amend policy in the May 2024 Federal Budget.

As the countdown to 1 July 2024 begins, seize the opportunity to shape your financial destiny. Explore these planning strategies, and remember, your financial future is in your hands. For personalised guidance and further assistance, reach out to today for your free consultation.

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