This Bills Digest replaces a preliminary Bills Digest published on 8 February to assist in early consideration of the Bill.

Purpose of the Bills

The purpose of the Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 (the Tax Cuts Bill) and the Treasury Laws Amendment (Cost of Living—Medicare Levy) Bill 2024 (the Medicare Levy Bill) is to amend taxation laws, with the aim of helping Australians with the cost of living.[1]

History of the original 3 stage tax cuts

General

The former Government’s 3 stage tax cuts are shaped and formed by 3 tax laws.

The first was the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (2018 Act). The 2018 Act introduced the Stages 1, 2 and 3 tax cuts, which were subsequently amended by the 2019 Act.[2]

The second was the Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Act 2019 (2019 Act) which amended the rates and income tax thresholds from the 2018 Act. The rates and thresholds have remained unchanged for the 3 stage tax cuts since the enactment of the 2019 Act. The 2019 Act provided for the Stage 3 tax cuts to commence in 2024‑25, which remains unchanged. In addition, the 2019 Act provided for the Stage 2 tax cuts to commence in 2022–23. However, the commencement date for the Stage 2 tax cuts would later be brought forward by 2 years under the 2020 Act.[3]

The third was the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (2020 Act):

• Schedule 1 of the 2020 Act provides for the Stage 2 tax cuts to commence in 2020–21
• the original Personal Income Tax Plan was moved forward by 2 years to provide cost of living relief during the COVID-19 pandemic
• as a result, Stage 1 tax cuts only lasted for 2 income years, ending in the 2019–20 income year.[4]

The precise changes created by these statutes are presented in the following Tables 1 to 4.[5]

Table 1 presents a side-by-side comparison of the tax rates and thresholds for 3 eras: pre-the 3- stage tax reforms (in 2017–18 income year), the current legislated 3 stage tax cuts (from 2018–19 to 2024–25 income years) and the revised Stage 3 tax cuts (in 2024–2025 and later income years).

Table 2 recaps the legislated tax rates and thresholds under the 2018 Act.

Table 3 recaps the changes to the tax rates and thresholds from the 2018 Act made by the 2019 Act.

Table 4 recaps the changes to the commencement dates of the Stage 2 tax cuts from the 2019 Act made by the 2020 Act.

Leaving aside the temporary low and middle income tax offset (LMITO) and the permanent low income tax offset (LITO), Table 1 shows that the former Government’s 3-Stage Plan implemented one permanent tax cut for low income earners in 2020-21 when the Stage 2 tax cuts increased the top taxable income threshold from $37,000 to $45,000 for the 19% tax rate. Low-income earners were not expected to experience another tax cut even if the former Government’s Stage 3 tax cuts become effective from 1 July 2024.

Under the Government’s revised Stage 3 tax cuts set out in the current Bills, it is proposed that low income earners (with the same taxable income thresholds between $18,201 and $45,000) will receive a tax cut of up to $804 pa (p. 3) (for an individual) and $1,608 (p. 4) (for a dual income couple) if the tax rate reduces from 19% to 16% from 1 July 2024. The 19% tax rate will be abolished altogether in the proposed plan. These proposed tax cuts also benefit middle to high income taxpayers earning above an annual taxable income of $45,000.

Table 1 further shows that the tax cuts for higher income earners (particularly those earning annual taxable income between $135,001 and $200,000) will be reduced under the revised Stage 3 tax cuts, when comparing to the original Stage 3 tax cuts. These impacts to the taxpayers are explained later in the section called ‘analysis of revised stage 3 tax cuts’.

The rationale and arguments for and against the three Bills which preceded the current Bills are set out in detail below.

Table 1:     Comparing the actual income tax rates and thresholds for a resident from 2017-18 to 2024-25, with the Government's revised Stage 3 tax cut for 2024-25

Note:

• The above rates do not include the Medicare levy of 2%.
• The bolded rates and thresholds indicate the changes from the former Government’s original Stage 3 to the Government’s revised Stage 3 tax cuts.  

Source: Parliamentary Library’s compilation of data from the following:

• For general tax rates from 2017-18 to 2023-24 (current), please refer to Australian residents tax rates 2010 to 2024 which are published by the Australian Taxation Office.
• For the original Stage 3 tax rates and thresholds which were legislated under the former Government, please refer to Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Act 2019 (2019 Act).
• For the revised Stage 3 tax cuts rates and thresholds which are proposed by the Government, please refer to the current Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024.

Table 2:     2018-19 Budget announced 3-Stage tax plan enacted by the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (2018 Act)

Note:

• The above rates do not include the Medicare levy of 2%.
• The highlights in red emphasise the tax rate and threshold changes from the year before due to the 3-Stage tax cuts which were announced in the 2018–19 Budget (pp. 33–34).

Source: Parliamentary Library’s compilation of data.

• For resident income tax rates and thresholds which were enacted from June 2018, please refer to Treasury Laws Amendment (Personal Income Tax Plan) Act 2018 (2018 Act).

Table 3: 2019-20 Budget announced 3-stage tax plan enacted by the Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Act 2019 (2019 Act)

Note:

• The above rates do not include the Medicare levy of 2%.
• The highlights in red emphasise the amendments by the 2019 Act to the Stages 2 and 3 tax rates and thresholds from the 2018 Act. The Stage 1 tax cuts which were enacted by the 2018 Act remain unchanged.  

Source: Parliamentary Library’s compilation of data.

• For the amended Stages 2 and 3 tax rates and thresholds which were enacted from July 2019, please refer to Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Act 2019 (2019 Act).
• For Stage 1 tax rates and thresholds, please refer to the 2018 Act.

Table 4:     2020-21 Budget announced 3-Stage tax plan enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (2020 Act)

Note:

• The above rates do not include the Medicare levy of 2%.
• The highlights in red emphasise the amendments by the 2020 Act to the timing of the Stage 2 tax cuts starting from October 2020. The Stage 1 tax cuts which were enacted by the 2018 Act remain unchanged. The Stage 3 tax cuts which were enacted by the 2019 Act remain unchanged. 

Source: Parliamentary Library’s compilation of data.

• For the further amended Stage 2 income tax rates and thresholds which were enacted from October 2020, please refer to Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (2020 Act).

2018 Bill — Origin of the 3-stage tax cuts

The 3-Stage Plan for tax cuts was initiated by the Turnbull Government in the 2018–19 Budget (p. 33).

The Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018 (2018 Bill) was introduced into the House of Representatives on 9 May 2018. In his Second Reading Speech then Treasurer, Scott Morrison, explained the rationale for the measure and provided information about how the Bill would operate:

This Bill implements the Turnbull government's Personal Income Tax Plan to make personal income taxes lower, simpler and fairer. It's about providing tax relief for working Australians, particularly those on middle to low incomes…

As outlined in the Australian Taxation Office taxation statistics, the personal income tax burden is carried by the few, not the many. In 2015-16, the top one per cent of taxpayers paid around 17 per cent of the $186 billion tax bill for personal income tax. The top 10 per cent paid around 45 per cent of this total, compared with around 36 per cent 20 years earlier…

Over the seven years of this plan, the government will provide tax relief to encourage and reward hardworking Australians and to reduce household budget pressures…

The plan will be delivered in three steps …

Step 1 of our plan will start permanent tax relief to low- and middle-income earners first as a priority, helping to ease household budget pressures. A new non-refundable low- and middle-income tax offset will provide tax relief of up to $530 to middle- and lower-income earners for the 2018-19, 2019-20, 2020-21 and 2021-22 income years…

The new tax offset is in addition to the benefit lower-income earners receive from the low-income tax offset, and will be paid in the same way—on assessment after tax returns have been lodged…

Step 2 of the plan is necessary to be voted on and made certain now. It will help ensure that incomes earned by Australians are protected from bracket creep. From 1 July 2018, the government will increase the top threshold of the 32½ per cent tax bracket from $87,000 to $90,000, providing a tax cut of up to $135 per year to around three million taxpayers. This builds on the 2016–17 budget increase to the top threshold of the 32½ per cent bracket from $80,000 to $87,000, and shows the Turnbull government's long-term commitment to reforming the personal income tax system.

From 1 July 2022, the government will provide tax relief of up to $1,350 per year by further increasing the top threshold of the 32½ per cent bracket from $90,000 to $120,000. This is projected to benefit around 3.9 million taxpayers and prevent around 1.8 million taxpayers from facing the second-top marginal tax rate of 37 per cent in 2022–23.

In addition, the top threshold of the 19 per cent tax bracket will be increased from $37,000 to $41,000 providing a tax cut of up to $540 a year. The low-income tax offset will also be increased from $445 to $645. The extension of the 19 per cent tax bracket together with the increase to the low income tax offset will guarantee the benefits of step 1 are maintained on a permanent basis…

Step 3 of the plan will make the personal tax system simpler and flatter. From 1 July 2024, the top threshold of the 32.5 per cent tax bracket will be further increased from $120,000 to $200,000, abolishing the 37 per cent tax bracket altogether and reducing the number of tax brackets from five to four. This is projected to prevent around 1.8 million taxpayers from facing a tax rate higher than 32.5 per cent.

The personal income tax plan is a package. We are legislating that whole package … [emphasis added]

Reference to Senate Economics Legislation Committee

Majority recommendation

The Bill was referred to the Senate Economics Legislation Committee (the Committee) which released its final report (Final Committee Report) on 18 June 2018. The Committee recommended that the Senate should pass the Bill (p. 16).

Dissenting views

The Final Committee Report contained dissenting reports from the Opposition Senators (pp. 17‑28) and the Australian Greens (pp. 29–30). The Australian Greens opposed the 2018 Bill in its entirety.

The Labor Senators’ stated their position as follows (p. 28):

Labor Senators support low and middle income tax relief.

Labor Senators want to ensure that a future Government can properly fund public services such as health, education and infrastructure while recognising that low and middle income households are under pressure. Labor Senators will not support unsustainable levels of tax cuts that put essential public services at risk.

The Labor Senators made the following 3 recommendations to the Committee (p. 28):

Recommendation 1

That the Government deliver tax cuts in a fiscally responsible way that does not jeopardise the ability for future governments to respond to changes in economic circumstances. 

Recommendation 2

That the Government ensures that any tax cuts do not risk the ability of future governments to fund important government services. 

Recommendation 3

That the Government prioritise legislating tax cuts which:

(a)   Are fair and equitable; and

(b)   Support low and middle income earners so as to deliver a bigger short term boost to consumption and economic growth.

Policy position of non-government parties/independents

Australian Labor Party

The key issue emerging from the Chamber debates was that the three stages of tax cuts were to be voted on as a single package.

For instance, Chris Bowen MP called on the Government to separate the 2018 tax cuts from the rest of the 2022 and 2024 tax cuts to ensure the speedy passage of the first of the three tax cuts through the Parliament. In addition, he requested further financial information about Stages 2 and 3. He explained: 

The Bill introduces a tax cut scheme which is in three tranches … we support the 2018 tax cuts. They should be implemented. …, the government should split this Bill …[to] allow the parliament to take a detailed and considered position on each of the three tranches.

Mr Bowen’s proposed amendments to the Bill were negatived in the House of Representatives.  

In the Senate, ALP Senator Penny Wong supported only the 2018 tax cuts but did not support Stages 2 and 3 of the tax cuts. She stated at the outset her view that the tax package was:

… both fiscally irresponsible and unfair, a tax package overwhelmingly biased towards some of the wealthiest people in the country, a tax package for the wealthiest parts of Sydney and Melbourne, not for the suburbs or the regions or states like Tasmania, Queensland and South Australia.

On 20 June 2018, amongst other amendments, Senator Wong moved amendments (4), (6) and (8) in sheet 8450 to ‘knock out’ the Stage 3 tax cuts in the Senate (pp.3403, 3404 and 3409). The Ayes and Noes both received 34 votes. These amendments were put to the House of Representatives. The House rejected the Senate’s proposed amendments and endorsed a statement of reasons for that decision. Despite Senator Wong’s further attempt to debate the Bill, the majority of the Senate voted not to insist on its amendments. The 2018 Bill passed both Houses and received Royal Assent on 21 June 2018.  

Meanwhile, Senator Wong’s other proposed amendments to Stage 2 tax cuts and tax offsets, and to include Labor’s bigger, better and fairer tax plan[6] were negatived in the Senate (pp. 3518–3520 and 3522).

Independents

In his Second Reading Speech on 20 June 2018, Independent Senator Tim Storer sought to amend Stages 2 and 3 of the tax cuts.[7] He explained that ‘[g]iven our substantial debt challenge—$341 billion net debt in 2017-18, and growing—it is irresponsible to proceed with the full income tax plan proposed by the government at this point in time.’ Senator Storer considered the 2018 tax cuts to be ‘affordable’. Former Senator Storer’s proposed amendments were negatived in the Senate (pp. 3512, 3523–3524).

Centre Alliance Senator Rex Patrick supported Labor’s move to remove the Stage 3 tax cuts from the 2018 Bill, having moved an amendment in similar terms to the ALP.[8] 

2019 Bill—additional tax relief

The Treasury Laws Amendment (Tax Relief So Working Australians Keep More Of Their Money) Bill 2019 was introduced into the House of Representatives on 2 July 2019. By the end of the same day, the House had completed its debate on the Bill. The 2019 Bill was then introduced into, and debated in, the Senate on 4 July 2019. It passed both Houses on that date and received Royal Assent on 5 July 2019, 3 days after it was introduced.[9]

Rationale for the Bill

In his Second Reading Speech on 2 July 2019, Treasurer, Josh Frydenberg MP explained the Bill:

This Bill delivers … a further $158 billion of tax relief. Our tax cuts provide both short-term relief and long-term reform. Australians earning up to $126,000 a year will receive up to $1,080, with more than 10 million Australians better off …

In 2024-25, the government will reduce the 32.5 per cent tax rate to 30c. This will accompany the abolition of an entire tax bracket, the 37 per cent tax bracket, which we have already legislated. The longer term structural reform will mean hardworking Australians will face a single marginal rate of tax of 30c in the dollar on the taxable income they earn between $45,000 and $200,000. Somebody who moves up the income scale by getting a promotion, working more hours or taking a second job will under these reforms get protection from bracket creep …

As a result of the government's plan, around 94 per cent of Australian taxpayers are projected to face a marginal tax rate of 30 per cent or less in 2024-25. This compares to just 16 per cent if stages 2 and 3 of our tax package didn't go through. Around 13.3 million taxpayers will pay permanently lower taxes by the time the government's plan is fully implemented …

Our tax relief measures will keep taxes as a share of GDP within the 23.9 per cent cap, ensuring that we don't impose an increasing tax burden on hardworking Australians. Securing future tax cuts now will provide confidence to Australians that they will be rewarded for their hard work and it will help protect their future pay increases from bracket creep …

The government plan will maintain a progressive tax system. It is projected that in 2024-25, around one-third of all personal income tax will be paid by the top five per cent of taxpayers, a slightly higher proportion than what they currently pay. Schedule 1 to the bill enhances the current low- and middle-income tax offset by increasing the base offset from $200 to $255 and the maximum benefit from $530 to $1,080 for the 2018-19, 2019-20, 2020-21 and 2021-22 income years. Schedule 1 of this Bill also increases the amount of the low-income tax offset from $645 to $700 from 2022-23. Schedule 2 of the Bill increases the top threshold of the 19 per cent tax bracket from $41,000 to $45,000 from 1 July 2022. It also reduces the 32½ per cent rate to 30 per cent from 1 July 2024.

Policy position of non-government parties/independents

Australian Labor Party

Speaking in relation to the Bill in the House of Representatives, on 2 July 2019, Anthony Albanese MP, Leader of the Opposition acknowledged:

… they've already flattened the tax levels in 2018. That has already happened. The level of 32.5c, down from 41c, to $200,000 has already been done—it's legislated. What's actually before this chamber is decreasing the 32.5c rate to 30c. And that has a cost of $95 billion. It has an annual cost in its first year of $19 billion.

However, he stressed that the ALP was ‘prepared to facilitate the legislation’. In addition, Mr Albanese stated:

… We are saying two things. Firstly, when the economy is flatlining like it is and when the Reserve Bank have gone to two interest rate cuts in two months and are saying that they can’t continue to do all of the heavy lifting, the bringing forward of stage 2 is a sensible proposition …Secondly, we are saying that it should be separated out. We can have it through, and we can stop talking in the Senate, really quickly.

If we get through stage 1 and stage 2, you can come back with stage 3 whenever you like. You have many years to do it...

Mr Albanese moved an amendment to the title of the 2019 Bill. However, his proposed amendment was negatived in the House of Representatives. 

Also speaking about the ALP’s response to the 2019 Bill, Dr Jim Chalmers MP moved amendments to remove the Stage 3 tax cuts that were to begin in the 2024–25 financial year, so that those measures that would provide immediate tax relief could be passed by the Parliament without delay.[10] He stated:

Our position on this tax bill is built on three fundamental principles. The first one, as we saw today with the Reserve Bank cutting rates again, is that the economy desperately needs a boost, and we want to give the economy a boost. The second principle is that everybody—every worker in the Australian economy—deserves to have a tax cut from this week in this parliamentary term and not on the never-never. The third principle is that it is irresponsible to sign up to a $95 billion tax cut which doesn't come in until after the next election five years away…

The House of Representatives negatived Dr Chalmer’s proposed amendments.

During debate on the 2019 Bill in the Senate, Senator Katy Gallagher reiterated the ALP position as stated by Dr Chalmers, and provided additional information about the ALP position in relation to the 2019 Bill as follows:

Schedule 1 of the Bill deals with stage 1 low- and middle-income tax offset changes…The Labor Party supports this increase to LMITO…

Stage 2 in this Bill has two elements to it. Firstly, there is the increase to the low-income tax offset that is in schedule 1 of the Bill…

Secondly, stage 2 of the government's Bill seeks to increase the top threshold of the 19 per cent income tax bracket from $41,000, which was legislated last year, to $45,000, from 1 July 2022—in three years time. The Senate may recall that, in last year's changes, the top threshold for the 32½ per cent tax bracket was lifted from $90,000 to $120,000, taking effect on 1 July 2022.

Labor wants to ensure that all Australian workers get a tax cut this term of parliament, which is why we will be moving amendments, later in the debate, which seek to bring forward the lifting of the tax bracket from $90,000 to $120,000 this financial year…

Let me turn now to stage 3. The Labor Party does not think it's responsible to sign up to stage 3 tax cuts in this Bill now. These tax cuts will cost $95 billion over the medium term and are not intended to come into effect until 1 July 2024—five whole years away...

So why does Labor have significant and serious concerns about locking in stage 3 now? Primarily, it's because we think it's irresponsible to sign up to $95 billion worth of expenditure from the budget now, five years before it's due…

And, most importantly, we simply don't know whether this $95 billion tax cut is actually affordable …

What little information we do know about the government's future budget management approach can be found in the budget papers. We know that the government has an arbitrary tax cap of 23.9 per cent. We know that the government is projecting growing surpluses as a percentage of GDP over the medium term. We also know that the government is projecting reduced spending, dropping from 24.6 per cent of GDP this financial year to 23.6 per cent of GDP by the medium term. So, while the government is asking us in this place to lock in $95 billion in extra expenditure, it is also saying, 'We are going to cap revenue increases, reduce spending and increase our surplus.' It just doesn't add up without an explanation of what services this government is going to cut….

In coming to our position on this bill, the Labor Party has tried to play a constructive role to help fix the Liberals' economic mess and provide tax cuts to all Australian workers at a time when that fiscal stimulus is so badly needed. We compromised on the tax package by changing our position and coming towards the government...In the committee stage, I'll be moving amendments on behalf of the Labor Party that do a couple of things: bring forward to 2019-20 the $90,000-to-$120,000 threshold change and carve out the stage 3 changes from the Bill, with a consequential fix to a table in the tax act.

Senator Gallagher’s proposed amendments[11] were negatived in the Senate. In particular, Labor lost narrowly by 2 votes for the proposed amendment (in sheet 8687) to remove Stage 3 tax cuts from the Bill.

Australian Greens

On 4 July 2019, Senator Whish-Wilson set out the views of the Greens on the 2019 Bill:

… the Greens clearly and loudly reject this government's tax package, its plan, its vision for the Australian economy, which gives more money to millionaires and risks the services that vulnerable Australians so desperately need into the future. These tax cuts will do nothing to help those who need our funds the most. They will do nothing to restructure Australia's economy for the 21st century. They will hamstring future governments from providing the public services, the infrastructure and the vision that will underpin a prosperous and happy Australia into the next century. They will turbocharge already growing inequality. These tax cuts are a $158 billion decision to starve future governments in favour of higher income earners having more money.

Senator Whish-Wilson’s proposed amendments to the tax offsets and to remove the Stage 3 tax cuts[12] in were negatived in the Senate.

2020 Bill—Covid-19 response

The Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 was introduced into the House of Representatives on 7 October 2020. It was passed the House on the following day, 8 October 2020. The Bill progressed rapidly through both Chambers and was passed by the Parliament on 9 October 2020. The Bill received Royal Assent on 14 October 2022.[13]

Rationale for the Bill

On 7 October 2020, Assistant Treasurer and Minister for Housing, Michael Sukkar MP said the following in relation to the Bill:

This Bill implements the Morrison government's tax plan for Australia's economic recovery from COVID-19 announced last night by the Treasurer…

First, we are lowering taxes for more than 11 million individuals who pay personal income tax…

Personal income taxes will be cut by bringing forward the second stage of the government's Personal Income Tax Plan by two years to this financial year. This involves increasing the top threshold of the 19 per cent bracket from $37,000 to $45,000 and increasing the top threshold of the 32.5 per cent bracket from $90,000 to $120,000. Under stage 2, the low income tax offset increases from $445 to $700, which will ultimately deliver more money into the pockets of some of the lowest income-earning Australians.

The government will also provide an additional low and middle income tax offset, worth up to $1,080, in 2020-21 that would have been removed under stage 2…

These tax cuts and business incentives are all about delivering money into people's pockets, getting the economy going as we recover from the unprecedented impact of the COVID-19 pandemic, and getting people back into jobs.

Policy position of non-government parties and independents

Australian Greens

In his Second Reading Speech on 8 October 2020, Senator Nick McKim stated the position of the Greens as follows:

… The Australian Greens oppose the bringing forward of these tax cuts. In fact, we oppose stage 2 and stage 3 of the tax cuts in any form and at any time, because these tax cuts are top end tax cuts. … the Greens have an amendment that would prevent millionaires from getting a tax cut. We're in the middle of the worst recession in a century… we should be using this money to keep JobSeeker and JobKeeper in full, to fund universal services like child care and our universities and to undertake a massive program of government investment into clean energy, public housing, essential public services, reforesting, rewilding and public infrastructure—for example, a light rail down the east coast of Australia.

… the Greens will move amendments to prohibit the full expensing of depreciable assets that are used for coal, gas, weapons manufacturing or tobacco and to restrict access to the full expensing of depreciable assets to those that have been produced or manufactured in Australia. These amendments would go some way towards ensuring that these business tax concessions help transition business activity so that it helps create a fairer, cleaner and more stable economy and society.

… I want to put on the record that, even though we do support elements of this legislation, taken as a whole, which I very much expect is what the Senate will require us to do … we will not be able to split out elements of this Bill and will be forced to take it as a package. If we are forced by the Senate to take this Bill as a package, notwithstanding the fact that we do support elements of this legislation, as I outlined earlier, we will vote against this package because, on balance, the bad outweighs the good.

The 6 amendments proposed by Senator McKim were negatived in the Senate. One of those amendments was to amend the Stage 2 tax cuts under Schedule 1 of the 2020 Bill.[14] 

The current Bills

Background

On 25 January 2024, the Prime Minister announced the revised Stage 3[15] tax cuts and the increase to the Medicare levy low-income thresholds to provide ‘more tax relief for more workers, to help with the costs of living’. On the same day, to assist taxpayers to comprehend the proposed changes, the Treasury released the following:

• a summary of the revised Stage 3 tax cuts
• the Treasury’s advice on amending tax cuts to deliver broader cost-of-living relief
• the Government fact sheet and
• the Government’s tax cut calculator.

Subsequently, on 4 February 2024, the Treasury released the draft legislation and explanatory materials, which are the same as the Bills introduced into Parliament.

Rationale for the Bills

The Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 (the Tax Cuts Bill) and the Treasury Laws Amendment (Cost of Living—Medicare Levy) Bill 2024 (the Medicare Levy Bill) were introduced into the House of Representatives on 6 February 2024. Speaking in relation to the Bills, (pp. 1–4 ), Treasurer, Dr Jim Chalmers stated:

[Tax Cuts Bill]

This Bill implements the Albanese Labor government's cost-of-living tax cut for middle Australia…

We found a better way to give a tax cut to every taxpayer but with a bigger emphasis on middle Australia, by cutting two rates and lifting two thresholds. By reducing the lowest rate of income tax from 19 to 16 per cent— Lowering the second tax rate from 32½ to 30 per cent— And raising the thresholds of the 37 and 45 per cent tax rates to $135,000 and $190,000 respectively. We are reforming the tax system, providing cost-of-living relief across the board and returning bracket creep… the 45 per cent threshold will be lifted on 1 July for the first time since Labor was last in office.

[Medicare Levy Bill]

Most Australian residents pay the Medicare levy, charged at two per cent of their taxable income. We are increasing the low-income thresholds by 7.1 per cent for singles, families, seniors and pensioners in line with average annual growth in the consumer price index…The increases contained in this bill mean that those with a taxable income of up to $26,000 will not be liable for the Medicare levy—that's an increase of almost $2,000. Seniors and pensioners will now be able to earn up to $41,089 before being liable for the Medicare levy. Couples and families will now be able to earn up to $43,846. Families who are eligible for the seniors and pensioners tax offset can now earn up to $57,198. And the thresholds for couples and families increases by $4,027 for each dependent child or student. These changes are about ensuring those on the lowest incomes, keep a bit more of their weekly pay packet— providing targeted relief to those that are doing it tough and helping to ease some of the pressures on Australian families, seniors and young people on modest incomes…

What the Tax Cuts Bill does

Tables 5 to 7 below compare the changes to the income tax rates and thresholds proposed by the Tax Cuts Bill with the current 2023–24 income year and the legislated 2024–25 income year, for resident, non-resident and working holiday taxpayers respectively.    

Table 5:     Comparisons of changes in tax rates and thresholds for resident taxpayers

Note: The above rates do not include the Medicare levy of 2%. Table A does not include tax offsets (eg LMITO and LITO).

Source: Income Tax Rates Act 1986, Clause 1 of Part I of Schedule 7 for current 2023-24 and legislated 2024-25 tax rates and thresholds; Item 2 of the Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 sets out in table form the revised rates and thresholds.

Table 6:     Comparisons of changes in tax rates and thresholds for non-resident taxpayers

Note: Foreign residents are not liable to pay the Medicare levy.

Source: Income Tax Rates Act 1986, Clause 1 of Part II of Schedule 7 for current 2023–24 and legislated 2024–25 tax rates and thresholds; Item 3 of the Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 sets out in table form the revised rates and thresholds.

Table 7:     Comparison of changes in tax rates and thresholds for working holiday taxpayers

Source: Income Tax Rates Act 1986, Clause 1 of Part III of Schedule 7 for current 2023-24 and legislated 2024-25 rates and thresholds; Item 4 of the Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 sets out in table form the revised rates and thresholds.

Impact analysis of revised stage 3 tax cuts on taxpayers

A number of entities have conducted distributional impact analysis of the revised Stage 3 tax cuts on taxpayers. These are discussed below.

Treasury

The distributional impacts of the revised Stage 3 tax cuts are explained in the Government fact sheet.

In Figure 1 below, the Treasury explained (p. 6) that the revised Stage 3 tax cut:

is estimated to provide cost-of-living relief to 13.6 million taxpayers, compared to 10.8 million taxpayers under the current legislated tax cuts compared to 2023–24 settings. This option is broadly revenue neutral and not expected to impact the outlook for inflation. Under the recommended package all taxpayers would receive a reduction in their tax liability. Across all income deciles, the tax cut is between 1.5 and 2.5 per cent of taxable income on average. Some taxpayers in the bottom quintile will have also benefited from increased government transfers and other support.

Figure 1:    Treasury’s analysis: Average tax cuts as a share of taxable income, by taxable income quintile, 2024–25.

Source: Treasury advice on amending tax cuts to deliver broader cost-of-living relief, p. 6, Chart 6.

In Figure 2 below, Treasury further explained (p. 7) that under the revised Stage 3 tax cuts, all resident taxpayers with taxable income under $146,486 will get a larger tax cut relative to the original Stage 3 tax cuts. For examples, an individual with taxable income of $40,000 would receive a tax cut of $654, in contrast to receiving no tax cut under the original Stage 3.

An individual with taxable income of $100,000 would receive a tax cut of $2,179, $804 more than under the original Stage 3. An individual with taxable income of $190,000 would receive a tax cut of more than $4,500, lower than under the original Stage 3 tax cuts, but still a larger absolute tax cut than other taxpayers.

Figure 2:    Treasury’s estimates of tax cuts ($) for resident taxpayers based on taxable income – Revised Stage 3 (blue) vs original Stage 3 (red)

Source: Treasury advice on amending tax cuts to deliver broader cost-of-living relief, p. 7, Chart 7.

Grattan Institute

In Figure 3 below, the Grattan Institute (p. 2) estimates that people with taxable incomes of less than about $146,486, or nearly 90% of all the taxpayers, will get either the same or larger tax cut under the new plan. The 10% with higher incomes will get smaller tax cuts than under the original Stage 3. The revised Stage 3 tax cuts for people earning more than $200,000 a year, who account for less than 5% of the taxpayers in 2024–25, will be halved, from $9,075 to $4,529 a year.

Figure 3:    Grattan Institute’s analysis on changes in distributional impacts between revised and original Stage 3 tax cuts

Source: Brendan Coates and Joey Moloney, ‘Albanese’s tax-cut plan: who wins and who loses, now and in the future?’, Grattan Institute (blog), 4 February 2014, p. 2.  

PBO analysis

The Parliamentary Budget Office (PBO) has completed about 10 costing and distribution analyses on the 3 stages of tax cuts between June 2018 and January 2024.[16] This Digest compares the two most recent and relevant PBO distributional analyses on the Government’s revised Stage 3 tax cuts and the original Stage 3 tax cuts.[17]

Table 8 below compares the PBO’s estimated amounts of revenue forgone between the revised and original Stage 3 tax cuts for both the 4-year and 10-year forward estimates periods. The PBO estimated that the Government will forgo $77.6 billion over 4 years or $318.1 billion over 10 years under the revised Stage 3 tax cuts. The PBO estimated that, under the revised Stage 3 tax cuts, the Government may forego 10% more revenue ($6.9 billion) than the original Stage 3 over the 4 years ending 2026–27. However, in the long run (over the 10 years ending in 2033-34), the amounts of revenue forgone are about the same – the revised Stage 3 may forego $5.5 billion (or -2%) less than the original Stage 3.

Table 8:     Comparing original and revised Stage 3 tax cuts – revenue forgone ($m)

Note:

• A positive number indicates an increase in Government receipts; a negative number indicates a decrease in Government receipts (or revenue forgone). 

Source: Parliamentary Library’s analysis based on the following data:

• For both original and revised Stage 3 tax cuts estimates, please refer to the January 2024 PBO distributional analysis, Table A1 (p. 4).  

Table 9 below shows that, over the 10 years’ forward estimates, both the original and revised Stage 3 tax cuts skew towards male taxpayers who are:

• $203.7 billion (or receiving 65% of the total tax cuts) better off compared with $109.4 billion (or 35% of total tax cuts) of benefits for the female taxpayers in the original Stage 3
• $183.8 billion (or receiving 58% of the total tax cuts) better off compared with $134.3 billion (42%) of benefits for the female taxpayers in the revised Stage 3.[18]

However, the tax cut gap between the genders is narrower under the revised Stage 3 (16%) than the original Stage 3 (30%).

Table 9:     Comparing original and revised Stage 3 tax cuts – gender ($m)

Note:

• A positive number indicates an increase in Government receipts; a negative number indicates a decrease in Government receipts (or revenue forgone). 

Source: Parliamentary Library’s analysis based on the following data:

• For revised Stage 3 tax cuts estimates, please refer to the January 2024 PBO distributional analysis, Table B2 (p. 6).  
• For original Stage 3 tax cuts estimates, please refer to the May 2023 PBO distributional analysis, Table B2 (p. 5).

Financial implications

The Tax Cuts Bill 2024 is estimated to decrease receipts by $1.3 billion over the forward estimates period ending in 2027–28 (p. 1). The Medicare Levy Bill is estimated to decrease receipts by $640 million over the 5 years to 2026–27 (p. 2) and was provisioned for in the 2023–24 Mid-Year Economic and Fiscal Outlook (p. 318).

Table 10:   Financial impact of the current two Bills ($ billion)

Source: Explanation Memorandum, pp. 1 and 2.

Reactions to the revised Stage 3 tax cuts

Following the Government’s announcement of the redesign of the Stage 3 tax cuts, stakeholders immediately focused on issues such as inflation, bracket creep, workforce participation, and calls for tax reforms etc. 

Key issue: Inflation

In her first media conference of the year on 6 February 2024, the Reserve Bank Governor Michele Bullock was asked ‘How much will changes to stage three tax cuts add to spending and inflation?’

The Governor responded:

The short answer to that is we don’t think it’s a material issue. If you look at Treasury’s analysis, they did a bit of analysis to look at what might happen depending on different marginal propensities to consume…

The bottom line really is that the fiscal envelope is the same. It’s the same amount of money being handed out to households. It’s distributed slightly differently, but we don’t think it has any implications for our forecast. [emphasis added]

Key issue: Bracket creep

Bracket creep, often referred to as 'fiscal drag', occurs when an individual's income increases over time and a higher tax rate starts to apply, but tax thresholds are held steady.[19] Bracket creep reduces progressivity of the individual's income tax scales over time. This is because the tax increase for individuals with lower incomes is greater as a proportion of their income than for those at higher incomes.[20]

Grattan Institute

The Grattan Institute estimates about 83% of the taxpayers can expect to pay the same or less tax over the next decade than they would have under the original Stage 3 tax cuts, despite the impact of bracket creep.

However, the Institute also explains that one consequence of the revised Stage 3 keeping the 37% tax brackets for incomes between $135,000 and $190,000 is that the average tax rates will rise more quickly for some upper-income earners than they would have under the original Stage 3. The share of taxpayers with a taxable income between $135,000 and $190,000 is expected to rise from 7% in 2024–25 to 13% in 2033–34 due to bracket creep.

In addition, high-income earners will pay substantially more tax over the next decade under the revised Stage 3 than under the original Stage 3. The Institute states: ‘Someone with a taxable income higher than 95% of all taxfilers – or about $197,000 in 2024–25 – will pay about $45,000 more in tax over the decade than if the Stage 3 tax cuts remained in place’.

Similar to the conclusion of the PBO’s 10-year distributional analysis in Table 8 of this Digest, the Institute expects that the revised Stage 3 would cost about the same to the federal Budget as the original Stage 3 cuts.

Finally, the Institute warns that the ‘biggest loser from the new tax plan may end up being the federal budget… The government’s tax plan will make it harder for this and future governments to meet community demands for more spending in areas such as healthcare, aged care, disability care, and defence. These tax cuts could cost middle Australia more than it thinks.’

Australian Financial Review

John Kehoe from the Australian Financial Review opines that people on higher incomes will run into tax bracket creep faster under the revised Stage 3 plan.

Some 1 million high earners (6 per cent of taxpayers) will lose out from the government reducing the top income threshold at which the top 47 per cent rate (including the 2 per cent Medicare levy) kicks in compared with what was previously legislated, the PBO tool showed.

Over the next decade to 2033-34, an extra 2.4 million (12 per cent) of taxpayers will run into the top threshold as a result of Labor’s changes (p. 3)

Mr Kehoe also noted :

Australia’s top 47 per cent rate kicks in at a relatively low-income level by international standards compared with New Zealand, Canada, the United Kingdom and United States.

Some economists and tax advisers have expressed concerns that this encourages tax planning, such as negatively gearing property, using family trusts and the self-employed incorporating their work activities to attain the 25 per cent small company tax rate.

It is understood Treasury advised the government the impact of Labor’s wind-back of tax cuts for high earners would have only a very marginal or negligible impact on tax planning because there had already been rapid growth in people using trusts under the existing tax system. Treasury advised these considerations were outweighed by a larger economic benefit from redistributing some of the tax cuts from higher earners to middle and lower-income earners.(p. 3)

The Conversation

Ben Phillips from the Conversation found that although the original Stage 3 tax cuts were advertised as a measure to overcome bracket creep, the tax cuts ‘wouldn’t have done it for most of the income groups, leaving all but the highest-earning group paying more tax after the change in mid-2024 than it used to in 2018’ (p. 3). According to Mr Phillips:

 The rejigged version of Stage 3 should compensate for the bracket creep better, leaving the top two groups paying less than they did in 2018 and compensating the bottom three better than the original Stage 3 (p. 3). 

Digital Story Innovation Team (ABC News)

While similarly stating that ‘winners outnumber losers in every neighbourhood’, the Digital Story Innovation Team points out that Gen Z are most likely to benefit from the revised Stage 3 tax cuts.

Weekend Australian

The Weekend Australian states (p. 1) that under the Government’s revised Stage 3 tax cuts, ‘a total of 3.3 million Australians are likely to pay higher income taxes over the next 10 years, building on the 2.1 million who will receive a smaller tax cut in the first year of the package compared with the one legislated by Scott Morrison in 2019’. The article also quoted independent economist Saul Eslake in calling bracket creep “an enduring problem” (p. 3) that governments had little appetite to tackle.

The Australia Institute

The Australia Institute published a discussion paper on the benefits of revised Stage 3 tax cuts by electorate. The paper states that the biggest winners are outer metropolitan electorates on the outskirts of our capital cities as well as rural electorates. National Party electorates will get a larger average benefit than Liberal and Labor electorates. Tasmania, the Northern Territory and South Australia will also see large benefits.

Key issue: Workforce participation

The media reported the Government’s message that the revised Stage 3 tax cuts will encourage workforce participation, particularly by women. However, there will be a time lag in terms of the actual numbers being published in the Australian Bureau of Statistics (ABS) Labour Force Participation statistics in general, particularly participation by women.

In Figure 4 below, Treasury provided the two charts (Chart A2 and A3) to show the latest workforce participation in Australia.

Figure 4:    Treasury’s analysis on current labour force participation (Chart A2) and average weekly hours worked (Chart A3)

Source: Treasury advice on amending tax cuts to deliver broader cost-of-living relief, p. 11, Appendix, Chart A2 and Chart A3.

Key issue: Calls for broader tax reforms

There have been calls for tax reforms from various sectors following the Government’s announcement of the revised Stage 3 tax cuts.

By pointing out that there are significant obstacles to change ‘Australia’s dysfunctional taxation system’, Professor Robert Breunig from the Australian National University calls for both Labor Party and the Coalition to enter the next election cycle with ‘an iron-clad commitment to systemic taxation reform in the following term of government’ and for a new tax summit to tackle the main areas of concern and raise potential reforms for our tax system. Professor Breunig also opined that most experts will argue to:

• reduce the system’s massive over-reliance on personal income tax
• reform corporate taxes to reduce the burden on small companies and appropriately tax natural resources and super-profits
• reform the laws surrounding trusts
• implement a broad-based land tax and end stamp duty
• implement a national road user charging regime
• harmonise the taxation of savings
• ensure balance in the net tax burden across generations
• future-proof the system to enable dialling up or down the ‘‘how much’’ of taxation in response to varying political bent and economic need.

The Business Council of Australia (BCA) has also called for a summit to break tax ‘malaise’. According to the BCA:

We need a national discussion on tax reform to break through the policy paralysis with critical decisions being left in the ‘too hard’ basket.

This is a practical first step that will bring people together to thrash out key issues and start the process for consensus on tax reform. The BCA is realistic that significant tax reform takes time but if we don’t start now our children and the whole country will be worse off.

On 31 January 2024 during a National Press Club address, Allegra Spender and Dr Richard Denniss raised similar concerns relating to the tax system and called for tax reform. Ms Spender mentioned that capital gains tax and stamp duty significantly add to the problem of housing supply. Using the Government’s 2023 Intergenerational Report, Ms Spender argued that current tax policy is:

• a significant factor for intergenerational inequality
• inadequate for responding to climate change
• complex to comply with and negatively affects productivity.

Ms Spender outlined her future plan of action and mentioned she would release her green paper on tax in mid-2024. As set out below, Ms Spender’s calls for broader tax reform were echoed by other Independent Members of Parliament during debate of the current Bills in the House of Representatives.

Industry bodies, such as the Tax Institute, Chartered Accountants Australia & New Zealand and the Institute of Financial Professionals, are also pushing for a comprehensive review and overhaul of the tax system because they believe the tax system has become unsustainable, overly reliant on income tax and no longer fit for purpose.

Meanwhile, the OECD and the International Monetary Fund have recently urged Australia to consider tax reform.

Policy position of non-government parties/independents

At the time of writing this Bills Digest, the Bills have already passed the House of Representatives.

Coalition

On 6 February 2024, Leader of the Opposition, Peter Dutton stated:

the Coalition is not going to stand in the way of providing support to Australians who are doing it tough. The Prime Minister’s made this change for his own political survival. We’re supporting this change – not to support the Prime Minister’s lie, but to support those families who need help now, because Labor has made decisions that have made it much harder for those families.

Shadow Treasurer, Angus Taylor MP criticised the Government’s 'broken promise' on the Stage 3 tax cuts, stating that the Coalition will take 'strong tax reforms' to the next election’. During his interview with David Speers on ABC’s Sunday Insiders (11/2/2024, 9:19am to 9:36am), when asked about his tax policy for the next election, Mr Taylor advised that he would not support changes to negative gearing. While Mr Taylor emphasised that details of his proposed tax reforms will be released closer to the election time, he would not be proposing changes to trusts and capital gains tax and raising the GST was ‘certainly’ not his focus. Instead, he would be focusing on lower, simpler, fairer taxes; getting the trust back from the Australian voters; fighting bracket creep and rewarding aspirations and hard work. He also mentioned his party had announced that small business should have the same accelerated depreciation arrangements they had prior to COVID. Mr Taylor also maintained his commitment to undo the Government’s changes to superannuation tax, but he also wanted to see the details in the upcoming May 2024–25 Budget.

Australian Greens

In his media release on 26 January 2024, Adam Bandt MP, Leader of the Australian Greens reiterated that the Greens had opposed the Stage 3 tax cuts package since their inception, said Labor has failed to deliver fairness for low and middle income earners and that the Greens would fight for further changes to the package. In his Second Reading Speech on 13 February 2024, Mr Bandt called for the Government to ‘shift on negative gearing and capital gains tax as well. Because, otherwise, generations are going to be locked out of having a home.’

Independents

In their Second Reading Speeches, all the independents who spoke on the Bills advised that they would support the Bills, although many expressed concern with issues such as the lack of community consultation prior to introduction of the Bills (Zali Steggall and Kylea Tink), the Government’s change of stance on the Stage 3 tax cuts (Andrew Gee, Dr Helen Haines) and the need for a broader examination of Australia’s tax system (Kate Chaney, Zoe Daniel, Dai Le, Dr Monique Ryan, Dr Sophie Scamps, Allegra Spender, Zali Steggall and Kylea Tink). A number of independent members advised that they had consulted their constituents on the proposed changes and that in general support had been expressed for the Bill, even in high-income electorates with citizens who would see their expected tax reductions decreased under the changes proposed by the Bills. However, they emphasised support for the changes was not universal (Kate Chaney, Zoe Daniel, Dr Monique Ryan, Dr Sophie Scamps, Allegra Spender, Zali Steggall and Kylea Tink). Calls for further relief from cost of living pressures were also raised, including by Dr Helen Haines, Dai Le and Dr Sophie Scamps.

Centre Alliance

Rebekha Sharkie from Centre Alliance supported the Bills, but called for further action on measures to address the rising cost of living, including examining the impact of migration on housing affordability.  

Jacqui Lambie Network

On 4 February 2024, Senator Jacquie Lambie called on the Coalition to support the revised Stage 3 tax cuts.

Position of major interest groups

The following interest groups announced their support for the revised Stage 3 tax Bills through media releases: Australian Council of Trade Unions (ACTU), Australian Council of Social Service (ACOSS), Oxfam Australia, the Australia Institute and Anglicare Australia.

The Australian Industry Group, Australian Chamber of Commerce and Industry, Business Council of Australia and Minerals Council of Australia issued a ‘Joint statement: Compelling case to stick to Stage 3 Tax Cuts’, supporting the Original Stage 3 tax cuts, two days before the Prime Minister’s announcement of the revised Stage 3 tax cuts on 25 January 2024.

On 25 January 2024, after the Prime Minister’s announcement on the revised approach to the Stage 3 tax cuts, the Business Council of Australia released a media statement stating that ‘much needed wholesale tax reform, to lock in prosperity for decades to come, is now much harder following the Government’s decision to reverse legislated tax cuts’.