Most taxpayers to get $804, but high-end tax cut halved as government rewrites stage 3

The government will halve the stage 3 tax cuts for the highest earners and use the money to deliver an $804 tax cut across the board.

Prime Minister Anthony Albanese is expected to confirm the details of the biggest policy shift in his government’s first term when he addresses the National Press Club on Thursday.

In addition to changing tax rates and thresholds, the government will also exempt some low-income taxpayers from the 2 per cent Medicare levy.

The proposal was approved by cabinet on Tuesday and supported by the Labor caucus on Wednesday afternoon.

The stage 3 changes constitute a clear broken promise — the government insisted as recently as Monday that it had not changed in its commitment to the Coalition-era cuts.

But Mr Albanese will tell the press club the reversal was motivated by changing economic circumstances, citing Treasury advice that the legislated cuts no longer make sense in a high-inflation environment.

“Some would say that we should stay the course, even if it means going to the wrong destination,” he is expected to say.

“To them I say, we are choosing a better way forward given the changed circumstances. We are doing the right thing, for the right reasons.”

Here’s what’s changing.

Revisiting stage 3 tax cuts

The government is proposing to cut the bottom rate of tax, which applies below $45,000, from 19 per cent to 16 per cent.

That will give a tax cut of up to $804 to all taxpayers, since the rates apply sequentially.

But at the same time, the government will reduce the stage 3 tax cuts for higher earners.

Under stage 3, a single 30 per cent rate was to apply between $45,000 and $200,000.

Instead, the government wants this rate to apply between $45,000 and $135,000.

The existing 37 per cent rate, which stage 3 was to abolish, would instead be retained, applying between $135,000 and $190,000.

And the top rate of 45 per cent would remain for incomes above that level.

Anyone who earns up to about $150,000 will still be better off than under stage 3.

But those above this level will get a smaller tax cut than they were expecting.

Those who earn above $200,000 — less than five per cent of taxpayers — will see their tax cut roughly halved, from $9,075 to $4,529.

The government will also raise the Medicare levy low income threshold. The threshold currently exempts those who earn below $24,276 from paying the 2 per cent levy.

Outlining the changes

Six years coming

The change undoes the government’s 2022 election commitment to leave the stage 3 tax cuts alone.

But it also takes Labor closer to its original position on the cuts when they were announced in 2018.

Back then, the Labor opposition supported the first two stages of the Coalition’s plan, which gave low- and middle-income earners a permanent tax cut of up to $1,080 a year.

But Labor voted against stage 3, labelling it “unfair” and “irresponsible”.

In an allusion to that history, the prime minister is expected to emphasise fairness in his remarks, noting the cuts would apply to “all 13.6 million taxpayers, not just some.”

Mr Albanese will also argue his plan is more responsible, citing Treasury advice that the changes will not add to inflation, will encourage people to work more, and will have minimal impact on the budget bottom line.

The full Treasury advice has not yet been released.

The Coalition appears certain to oppose the plan. Shadow Treasurer Angus Taylor has accused the government of “the mother of all broken promises” and of declaring “class warfare” on higher earners.

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Speaking before the full details of the changes were known, Deputy Liberal leader Sussan Ley said there was “no way in the world” the Coalition would support what she called “an attack on aspirational Australians.”

It’s not yet clear whether this means opposing the entire package, or just the components that affect the tax cut for higher earners.

Assuming they vote against the change, the government will need the support of the Greens and two other Senators to pass its plan into law, which appears likely.