As July payslips start to trickle in, you may have noticed a pleasant surprise. You might have been paid more than you normally would have received. No, you didn't receive a mystery payrise from your employer. This is actually due to the Federal Government's tax cuts coming into play.

As of the 2024-2025 financial year, which began on 1 July 2024, the Government's Stage Three Tax Cuts have come into affect. This means that if you are on a PAYG (or 'pay as you go' tax structure) payroll, you will be taxed less, and therefore receive more money in your fortnightly or monthly pay packet.

 

Who gets a tax cut?

Everyone who earns more than $18,200 will receive a tax cut. This is because those who make $18,200 or less do not pay tax. Stage Three Tax Cuts are the final stage of a three-phase tax adjustment plan that appeared in the 2018 Budget.

The first stage was the low and middle income tax offset which ran from 2018-2022. It was a temporary tax relief plan until the third stage could be implemented permanently. The second stage saw the 32.5% bracket move from $87,000 to $90,000 and then to $120,000. Additionally the 19% bracket moved from $37,000 to $41,000 and there was an increase to the low income tax offset to $645.

 

How do I find out how much extra will be in my pay packet?

It is best to use the Government's calculator. As a guide, those on $80k will roughly receive $1,679 back per year.

Remember that all of these tax estimates do not account for the medicare levy.

 

 

Aren't Stage Three Tax Cuts problematic?

It depends on who you ask.

Some people argue the tax cuts are bad because putting more money into people's pockets at the moment could contribute to high inflation.

Others argue they are unfair because people who earned more received a larger sum back. But this is because our tax system uses percentages. To keep taxation fair in Australia, you are taxed based on a stepped percentage system. Meaning, the more you earn, the more you pay.

Let's look for example at one of the middle tax brackets - the 32.5% bracket.

Person A earning $50,000 and person B earning $100,000 both sit in this tax bracket. At the 2023-2024 tax year, person A will roughly pay $6,717.00 and Person B will pay $22,967.00 in taxes.

In the 2024-2025 tax year they will both receive a 2.5% tax cut on every dollar they earn over $45,000. This is because the 32.5% bracket is moving to 30%. When this happens, person A will roughly pay $5,788 and Person B will pay $20,788 in taxes.

In this scenario, person B had their tax reduced by more than person A. This is because they pay far more to begin with.

Owing to this stepped, percentage-based system, it works the other way too. If you raise taxes, those who earn more will pay more. But if you cut them, those who earn more will receive more back.

Tax raises or cuts will typically always happen as a percentage of your income in order to keep the system fair. Governments will regularly cut and adjust taxes to account for bracket creep.

 

What is bracket creep?

Bracket creep is a term that refers to the scenario where inflation pushes you into a higher bracket, and therefore you pay more tax relative to what you money is worth.

Let's look at the taxation rates from the 2000-2001 financial year. The top bracket for that tax year was $60,000. Meaning that every dollar you earned over $60k was taxed at 47%. Of course this was more than 20 years ago, and $60,000 was worth a lot more than it is today. Now, those earning $60k will sit in the 30% bracket, a bracket that is more relative to the true value of that salary.

Over time, our Government will need to cut taxes and change taxation rates to account for the real value of money.

 

*Note, all tax refund estimates are approximations and do not include the medicare levy. Actual tax amounts may differ depending on your personal circumstances.