Stage 3 tax cuts and the revisions announced in January are hot property right now. But what exactly are they and how will they impact homeowners, investors and renters?

Let's take a look.

Stage 3 tax cuts: background

Stage 3 tax cuts were announced by then treasurer, and later Prime Minister, Scott Morrison in the 2018-19 budget as part of a seven-year, three-stage tax plan.

The first step began on July 1, 2018, with the plan of bringing immediate tax relief for low and middle-income earners.

Stage 2 was brought forward by two years to July 1, 2020, with the aim that it would aid middle-income earners, and protect them from "bracket creep" (more on this concept later).

Stage 3 was always set to begin on July 1, 2024, with the aim of "simplifying and flattening the (current tax) system".

However, the current buzz about stage 3 tax cuts is due to Prime Minister Anthony Albanese announcing changes to the original plans in January.

Original Stage 3 tax cuts: what were they?

In the simplest terms, the original Stage 3 tax cuts would have decreased middle-income earners' tax cuts, with those on a high income benefiting the most.

These cuts would have deleted the current 37% rate for $120,001-$180,000 income earners, resulting in just three "tax brackets" for Australia (bar the nil rate for $18,200 or less earners) - 19%, 30% and 45%.

Instead, a highly enlarged, single 30% tax bracket would have been created for those earning between $45,001 and $200,000.

Those earning $200,000 and over (rather than those earning $180,000 and over) would have been taxed at a 45% rate.

Revised Stage 3 tax cuts: what are they?

Mr Albanese's revised Stage 3 tax cuts have now taken Australia back to four tax brackets (or five, with the zero tax bracket), with the 37% tax bracket to remain - although with some changes.

• $18,201-$45,000 earners - 16% tax cut (down from original Stage 3's 19%)
• $45,001-$135,000 earners - 30% tax cut (down from original Stage 3's $200,000 maximum)
• $135,001-$190,000 earners - 37% (down from FY2023 $120,001-$180,000 maximum)
• $190,001 and over earners - 45% (down from original Stage 3's $200,000+ maximum)

Stage 3 tax cut changes: why are they controversial?

Even before Mr Albanese introduced his Stage 3 revisions, the tax cuts were causing controversy.

This is largely due to the tax benefits that Stage 3 will give high-income earners, rather than those already struggling on middle-income wages, thanks to cash rate rises, and cost-of-living pressures including high inflation.

Plenty of people also don't like the fact that yet another election promise has been broken with the tax cut revisions.

There is also strong concern that "fiscal (or financial) drag" - more commonly known these days as "bracket creep" - will continue under the Stage 3 revisions, and even under the original plan.

In simple terms, bracket creep occurs when a worker's wage rises or even remains the same but due to inflation, "creeps" up anyway - and in doing so, is impacted by a higher tax threshold.

This concept is why tax cut thresholds need to change regularly.

Some financial experts are arguing against the Stage 3 revisions as they give middle to high-income earners less wiggle room when it comes to bracket creep.

Stage 3 tax cut changes: "war against aspiration"

Shadow Treasurer Angus Taylor's "war on aspiration" line - which he said Mr Albanese was doing when he introduced his Stage 3 revisions - is now as popular as the bracket creep concept.

The revised Stage 3 plans have many people concerned that there's little point in working harder, or simply aspiring to, higher-paid promotions.

Yet the original seven-year, three-stage tax plan was designed to "encourage aspirational Australians to get ahead while being fiscally responsible".

The three stages would also "reward hardworking Australians and drive a stronger economy".

Plus, while high-income earners in particular will receive the highest Stage 3 tax cuts, they also shoulder the country's largest tax burdens.

In June 2023, Australian Taxation Office figures showed Australia's tax rate for its highest-paid workers was at its highest level in at least 10 years, with the average individual tax bill increasing more than $47,000 on the previous year.

In other words, far from being unfair, the Stage 3 plans - and that's including the revised ones - could be the opposite.

Tribeca Financial director, Ryan Watson told Mortgage Broker that the revised plans would "improve equality for everyday Australians... particularly for ‘middle Australia’ who do a lot of our country’s heavy lifting.”

There are also concerns that the revised Stage 3 cuts won't help Australia's economy compete against other first-world labour markets, many of which offer similar wages but far lower tax rates.

Stage 3 tax cuts: property market impact

High-income earners keen to reduce their taxable income may switch to property investment - or purchase more such properties.

At the same time, Mum and Dad property investors wary of Mr Albanese's wariness of negative gearing may look to other investment opportunities - rather than properties - to decrease their tax load.

With the recent Stage 3 revisions, vendors are more likely than buyers to pocket more money with some buyers having more cash to spare than planned under the original Stage 3 cuts.

Property and financial experts are also trying to predict what impact the revised tax cuts will have on cash rates and inflation. 

The Reserve Bank of Australia (RBA) has already told Treasurer Jim Chalmers that the new changes won't add to inflation.

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