The stage 3 tax cuts will impact all Australians

Understanding the Stage 3 Tax Cuts

Originally introduced by the Australian Government in 2018, Stage 3 tax cuts will commence 1 July 2024.

Inflationary and cost of living pressures currently being experienced by Australians, has resulted in a review by the Federal Government to provide tax relief to more Australians, in particular, low to middle-income earners¹. As a result, the Treasury Laws Amendment (Cost of Living Tax Cuts) Bill 2024 was recently passed by Parliament, resulting in a change to the tax rates and tax brackets that are to apply from 1 July 2024.

Here’s how marginal tax rates compare under the current and future Stage 3 tax rates:

* Assumes a Medicare levy of 2%

Set to come into effect from July 1, 2024, the new tax rates represent a progressive shift in the tax landscape. However, it's crucial for investors to grasp their implications.

What is Bracket Creep?

The new Stage 3 tax brackets have reignited the discussion on bracket creep and how inflationary pressures can mean that Australians pay more tax in the future given increases in future tax assessable levels.

As income rises over time, individuals may find themselves pushed into higher tax brackets sooner than expected. This change, driven by the misalignment of marginal taxes to income and wages growth, can lead to greater future tax liabilities, affecting a broader spectrum of Australians annually.

Chart 1: Comparing current tax bracket, original Stage 3 tax cuts and new Stage 3 tax cuts

Stage 3 tax cuts offer the opportunity for tax-efficient strategies

Amidst these changes, investors have a unique opportunity to explore investment structures that can be tax efficient, to mitigate the impact of bracket creep. Superannuation remains a highly tax-effective way preserve savings to provide for retirement, offering concessional tax treatment of contributions and favourable tax rates on earnings within the fund. However, it's essential to note the evolving regulatory landscape, such as the proposed Division 296 tax on large superannuation balances², requiring careful consideration in financial planning strategies.

For those seeking alternative or additional avenues for tax optimisation to accumulate wealth, investment bonds emerge as a compelling solution. Operating as a tax-paid structure, investment earnings from an investment bond do not form part of your personal taxable income and can help avoid the potential of creeping into the next tax bracket and unexpected tax liabilities. Any income you receive from an investment bond doesn’t contribute to your overall taxable income, helping you to reduce the overall impact of bracket creep.³

Embracing the benefits of investment bonds

As a leading innovator in the tax-aware investment space, Generation Life has pioneered a forward-thinking approach to providing higher after-tax returns through our new generation of investment bonds. Our focus on minimising the impact of tax on returns, particularly for investors above the 30 percent marginal tax rate, sets a new standard in tax-efficient investing that complements superannuation. Our market-leading tax-aware approach and in particular, our growth-orientated investment options are estimated to further reduce the investment bond’s long-term effective tax rate to just 12-15 percent⁴, with no additional investment risk.

Chart 2: Generation Life’s Tax Optimised Investment Series long-term effective tax rates regardless of an investor’s tax bracket

Beyond tax efficiency, investment bonds offer stability and flexibility. With a robust legislative framework, no contribution limits, coupled with the ability to access funds at any time, they provide investors with certainty and control over their financial future. Investment bonds present a compelling proposition in today's ever-changing financial landscape.

Your tomorrow starts today.

With the Stage 3 Tax Cut now set in stone, it's time to leverage tax-effective structures, such as investment bonds, providing you the opportunity to maximise your wealth accumulation. These powerful tax-efficient strategies can offer a pathway to financial success, minimising the impact of bracket creep and unexpected tax liabilities.

But you don't have to navigate this journey alone. Partnering with a financial adviser can help you understand the different tax structures available, guiding and empowering you towards a financial future in which you thrive.

¹ The Government’s factsheet ‘Tax cuts to help Australians with the cost of living’, https://treasury.gov.au/sites/default/files/2024-01/tax-cuts-government-fact-sheet.pdf

² Refer to https://treasury.gov.au/consultation/c2023-443986

³ If no withdrawals are made within the first 10 years of the investment bond. Beyond 10 years there is no tax to declare regardless of earnings.

⁴ Indicative effective average tax rates – these represent the estimated effective average annual tax as a percentage of earnings for each 12-month period over a period of 15 years. Actual tax amounts payable are not guaranteed and may vary from year to year based on the earnings of investment option(s).