Pittwater Life Febraury 2024 Issue

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Business Life: Money with Brian Hrnjak Business Life What do Stage 3 tax cuts mean in Stage 2 of FY 2024? This month as we pass the halfway mark of the financial year we look ahead to some upcoming changes and how to play them… A lot of the focus on financial preparedness for this financial year is being driven the coming change to the personal income tax scales. So much media time has been taken up with the merits of the socalled ‘Stage 3’ tax cuts that a brief look over the politics is probably warranted. To do this, let’s step into a time machine and revisit budget night on 2 April 2019. Josh Frydenberg has just announced that the budget was ‘back in black’ and to celebrate, the Morrison Government would implement a three-stage program of taxation relief. Recall that budget night was brought forward to 2 April and a federal election to be held on Saturday 18 May was announced only a week following the budget. Stage 1 of the program was in the form of the LMITO – Low and Middle Income Tax Offsets, aka the ‘Lamington’ in 2019. Stage 2 was an adjustment of the scales between $37,000 and $45,000 and $90,000 and $120,000 thresholds in 2020, plus extensions to LMITO and the low-income tax offset (LITO). Stage 3 is an adjustment of the scales between $45,000 and $200,000 thresholds. You get the drift; lower income earners were feted by the government early and just before an election. High income earners were recognised but put on the backburner, potentially some governments into the future. No-one at this stage knew that bushfires, floods and COVID were coming. To continue with the examination of the politics, we need to look back at Bill Shorten’s campaign during the 2019 election. I’ve seen the clip of him jogging… you can’t unsee it. The really relevant item for us was his interaction with a blue-collar worker in Gladstone Queensland; here’s how it was viewed in the official election review undertaken by Craig Emerson and Jay Weatherill: “On a visit to Gladstone in central Queensland, Bill Shorten was approached by a coal export terminal worker who said many of them earned $250,000 a year through overtime and evening shifts. The worker suggested: ‘It would be good to see higher wage income earners given a tax break.’ Shorten responded: ‘We’re going to look at that.’ Labor’s policy, as outlined in the Budget reply, was to restore the 2 per cent deficit levy for incomes over $180,000, increasing the tax rate for those taxpayers. The slip or change of position was run heavily in the media. This further fuelled the ‘Shifty Shorten’ narrative. Morrison sought to capitalise on this during the second debate by physically advancing on Shorten, but Shorten parried with a ‘space invader’ jibe.” Tricky; the guy wanted to talk about the scourge of bracket creep, but Bill didn’t have the heart to tell him they were going to tax him another 2% on his income over $180,000 (to 51% including Medicare levy) – at least not while all those pesky TV cameras were around. And there in that paragraph is the likely reason why following the 2019 election the opposition led by Anthony Albanese voted with the government in passing the Stage 3 cuts which are now law and commence on 1 July this year. Average earnings in Australia according to the latest from the ABS were just shy of $90,000 for men and $78,000 for women. It is not unusual for what could be considered 52 FEBRUARY 2024 The Local Voice Since 1991
traditional Labor voting occupations to cross into the highest taxation brackets. Both political parties need to be able to appeal to the broad centre and that certainly includes this higher earning cohort who dislike paying close to half of what they earn above a threshold to the government. The effect of the Stage 3 tax cuts on a range of income levels is per the table above: There are benefits to taxpayers earning from $45,000 in taxable income and rising as income approaches $200,000. Beyond that threshold there are decreasing returns. The main effect of the Stage 3 cuts comes in as income crosses over $120,000 where the marginal tax rate falls from 37% to 30% and from $180,000 to $200,000 as the marginal rate falls from 45% to 30%. So what would I be doing in anticipation of these new scales coming in? The general theme is simple – bring forward any deductions and defer any income if possible. We do know that these tax cuts are law so income earners around these thresholds can anticipate savings in the new financial year, this may be grounds for bringing forward superannuation contributions into this year either as a salary sacrifice if you have not been making the maximum contributions or as catch-up concessional contributions if you are eligible. Markets have been good so those hovering under the $500,000 balance threshold at 30 June last year (which allows you to make catch up contributions) may be wise to act before 30 June this year as the 2018/19 cap amounts will expire this financial year. What we don’t know is what might be in the budget. Depending on the numbers, Treasurer Chalmers may use the carrot approach and reintroduce a LMIFO type benefit for lower income earners or revert to a stick and whack retirees or high-income earners in other ways. Also, at this stage we don’t know the December quarter CPI or Average Weekly Ordinary Time Earnings (AWOTE) to know if there will be indexation of transfer balance caps for superannuation pensions or superannuation contribution thresholds, respectively. * Proving that a week is a long time in politics, as we went to print the PM signalled an intent to review the form of the Stage 3 tax cuts. While the amounts may change the principles of the discussion above are still sound and highlight the need to consider politics as a risk factor in personal financial planning. Business Life The Local Voice Since 1991 Brian Hrnjak B Bus CPA (FPS) is a Director of GHR Accounting Group Pty Ltd, Certified Practising Accountants. Office: Suite 12, Ground Floor, 20 Bungan Street Mona Vale NSW. Phone: 02 9979-4300. Web: ghr.com.au and altre.com.au Email: brian@ghr.com.au These comments are general advice only and are not intended as a substitute for professional advice. This article is not an offer or recommendation of any securities or other financial products offered by any company or person. FEBRUARY 2024 53
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