Stage 3 Tax Cuts Explained

What changed on 1 July 2024

From the 2024-25 financial year, every Australian tax resident earning more than $18,200 pays less income tax. The changes — commonly called the “Stage 3 tax cuts” — were the final and largest part of a three-stage personal income tax plan that began in 2018.

Four things changed at once:

• The 19% rate dropped to 16% — the first cut to the second-lowest bracket since 2012.
• The 32.5% rate dropped to 30%, and its ceiling rose from $120,000 to $135,000.
• The 37% bracket narrowed — it now covers $135,001 to $190,000 instead of $120,001 to $180,000.
• The 45% top rate threshold rose from $180,001 to $190,001.

The net effect: lower rates on income below $135,000 and a wider gap before the top rate kicks in. The tax-free threshold ($18,200) and the top marginal rate (45%) stayed the same.

Tax brackets: before and after

The tables below show the resident tax brackets immediately before the Stage 3 cuts (FY 2023-24) and after (FY 2024-25 onwards). The 2025-26 brackets are identical to 2024-25.

FY 2023-24 (before Stage 3)

FY 2024-25 onwards (after Stage 3)

How much you save at every income level

The table below compares the income tax payable (excluding Medicare levy) under the old FY 2023-24 brackets and the new FY 2024-25 brackets for a resident taxpayer claiming the tax-free threshold.

A few things stand out from this table:

• Everyone earning above $18,200 saves something — even someone on $30,000 gets $354 per year from the 19% to 16% rate cut.
• The saving grows with income up to a cap. Between $135,000 and $190,000, the annual saving plateaus at $3,729.
• Above $190,000, there is an additional $800 saving from the higher top-rate threshold, bringing the maximum to $4,529 per year.

The three-stage plan: a brief history

The Stage 3 cuts didn't appear in isolation. They were the final piece of a three-stage personal income tax plan originally introduced by the Turnbull government in the May 2018 Budget and legislated through the Treasury Laws Amendment (Personal Income Tax Plan) Act 2018.

Key dates

• May 2018 — Three-stage plan announced by Treasurer Scott Morrison in the federal Budget.
• July 2019 — Stage 3 legislated under the Morrison government. Labor voted for it despite earlier criticism.
• October 2020 — Stage 2 brought forward by two years (from 2022-23 to 2020-21) as a COVID economic stimulus measure.
• May 2022 — Albanese government elected. Initially committed to keeping Stage 3 unchanged.
• 25 January 2024 — PM Albanese announced revisions to Stage 3, citing cost-of-living pressures and the need to support lower-income earners.
• 27 February 2024 — Revised plan passed both houses of Parliament via the Treasury Laws Amendment (Cost of Living Tax Cuts) Act 2024.
• 1 July 2024 — Revised Stage 3 cuts took effect.

Original vs revised plan

The revision was one of the most significant last-minute changes to tax legislation in Australian history. Here's what would have happened under the original plan compared to what actually passed.

Original Stage 3 brackets (never enacted)

The original plan had only four brackets — collapsing the 32.5% and 37% rates into a single 30% band spanning $45,001 to $200,000. Crucially, it did not touch the 19% rate, so earners below $45,000 received zero benefit.

Saving comparison: original vs revised

The crossover point is roughly $146,000. Below that, the revised plan delivers equal or larger cuts. Above it, the original plan was more generous — in some cases significantly so. Someone on $200,000 would have saved $9,075 under the original plan but receives $4,529 under the revised version.

Who benefits most

The original Stage 3 plan was criticised for skewing toward high earners. According to the Parliamentary Budget Office, the majority of the combined Stage 2 and 3 benefits would have flowed to the top 20% of taxpayers. Someone earning $200,000 would have received $9,075 per year, while someone on $40,000 would have received nothing.

The revised plan redistributed the benefits. The Treasury described the changes as providing “larger tax cuts to low and middle income earners.” In concrete terms:

• Under $45,000: The 19% to 16% rate cut delivers $354 – $654 in annual savings. These earners received nothing under the original plan.
• $45,000 – $135,000: Benefits from both the lower 16% and 30% rates. This is where most Australian workers sit. A teacher on $80,000 saves $1,679 per year — nearly double the $875 the original plan offered.
• $135,000 – $190,000: Still saves $3,729 per year. These earners benefit from the 16% and 30% rate cuts but no longer get the 37% bracket abolished as originally planned.
• $190,000+: Saves $4,529 per year — meaningful, but about half the $9,075 the original plan offered at $200,000.

What happened to the 37% bracket

The 37% marginal rate was the central point of difference between the original and revised Stage 3 plans.

Retaining the 37% bracket meant the cost savings could be redirected into the 19% to 16% rate cut — the change that delivered benefits to every taxpayer earning above $18,200, including those below $45,000 who would have received nothing under the original plan.

For anyone earning between $135,001 and $190,000, the 37% rate applies to a relatively narrow $55,000 slice of income. The maximum extra tax from this bracket compared to a flat 30% rate is $3,850 (i.e., 7% × $55,000). But the 16% and 30% rate cuts on income below $135,000 offset much of that.

LMITO, LITO, and other offsets

The three-stage tax plan involved changes to tax offsets as well as brackets. It's worth understanding what happened to each.

LMITO (Low and Middle Income Tax Offset) — now gone

The LMITO was a temporary offset introduced under Stage 1 of the tax plan. It provided up to $1,500 per year (after being increased several times) and was available from FY 2018-19 through FY 2021-22. It was not extended beyond that. Some taxpayers who had grown accustomed to the LMITO found their 2022-23 tax bills higher than expected when it disappeared.

LITO (Low Income Tax Offset) — unchanged

The permanent LITO of up to $700 was increased under Stage 2 (from $445 to $700) and has remained at that level since FY 2020-21. It was not changed by the Stage 3 legislation. The LITO phases out between $37,500 and $66,667 of taxable income.