Legislation has been passed by both houses of Parliament to implement the government’s revised settings for the Stage 3 tax cuts. These changes present taxpayers with an opportunity to save on taxes. Let’s take a closer look at the tax cuts and how you can take advantage of them.

The stage 3 tax cuts bring several changes to the tax rates. The 19% tax rate will be reduced to 16% for incomes between $18,200 and $45,000. The 32.5% tax rate will be reduced to 30% for incomes between $45,000 and the new $135,000 threshold. The threshold at which the 37% tax rate applies will increase from $120,000 to $135,000, and the threshold for the 45% tax rate will increase from $180,000 to $190,000.

What makes these tax cuts different from typical timing strategies is the potential for a permanent tax saving over a two-year period. By reducing your taxable income in the 2023-24 year and increasing it in the 2024-25 year, which is taxed at a lower rate, you can achieve a lasting tax benefit. This makes it worth considering various options to shift taxable income.

 

How much can you save?

The amount you can save depends on your income level and the amount of taxable income you shift. Higher income earners will have a marginal tax rate of 45% regardless of timing, while those on lower incomes will have smaller potential savings. However, if your taxable income falls within the range of $120,000 to $135,000, for example, you can achieve a permanent saving of 7% on up to $15,000 in
shifted taxable income.

Let’s consider an example. Suppose you own a rental property that requires a $15,000 paint job, and you were planning to have it done by Christmas. By arranging to have the job done in May or June, you can save $1,050. While it may not be a massive amount, it’s a significant saving worth considering.

 

Shifting taxable income into 2024-2025

To shift taxable income into the 2024-25 year, you can explore various options. However, it’s important to note that tax laws include anti-avoidance rules to prevent tax planning strategies with the sole purpose of gaining a tax advantage. It’s advisable to consult with professionals before taking any action to ensure compliance.

 

Bringing deductions forward

One option is to bring deductions forward into the 2023-24 income year. This offers the widest range of opportunities for achieving a permanent tax saving. For example:

• Rental properties
  If your rental property needs maintenance or repairs, consider getting them done before the end of June 2024. This allows you to bring the deduction into the 2023-24 year and keep your tenants happy.
  
  
• Gifts and donations
  If you regularly make donations to charities, consider making them before the end of June 2024. This benefits both the charities and potentially provides a tax advantage. Ensure that your chosen charity is a deductible gift recipient.
  
  
• Superannuation
  Consider making after-tax contributions to your super fund, but be aware of contribution caps and additional taxes for high-income earners. Seek financial advice before taking action.
  
  
• Sole traders and partnerships
  If you operate a small business, there are several possibilities to consider:
  
  
  • Depreciation – If you need new equipment or tools for your business, consider purchasing them before the end of June 2024 to take advantage of the higher tax rate in the 2023-24 year.
  • Bad debts – If you have unpaid receivables that you believe won’t be recovered, consider writing them off and taking the deduction now.
  • Obsolete stock – If you have stock that is unlikely to be sold, write it off before the end of June 2024 and claim the deduction.
  • Bring forward deductible expenses – Stock up on consumables and prepay deductible expenses before the end of June 2024.
  • Employee bonuses – Confirm commitments to pay employee bonuses by 30 June 2024 and withhold PAYG taxes accordingly.
  • Skills and training – Take advantage of the small business entity skills and training boost before it ends on 30 June 2024.
  • Energy incentive – Utilise the small business entity energy incentive for eligible assets or upgrades installed by 30 June 2024. Eligible assets include heat pumps and electric heating or cooling systems, and demand management assets such as batteries or thermal energy storage. Note: this incentive is provided for in the same Bill as the $20,000 instant asset write-off provisions, which is currently before Parliament and is expected to pass before 30 June 2024.

 

Deferring income

While options for shifting income into the 2024-25 year are more limited, you can consider salary sacrificing into super before 30 June 2024 and ensure that term deposits mature after that date to defer income.

It’s important to reiterate that anti-avoidance rules exist, and it’s crucial to consult with professionals to ensure compliance with tax laws. By exploring these strategies and understanding the implications, you can take advantage of the Stage 3 tax cuts and potentially achieve permanent tax savings.

 

Conclusion

The stage 3 tax cuts provide taxpayers with an opportunity to save on taxes by strategically managing their taxable income. By exploring various options and seeking professional advice, individuals and businesses can potentially achieve permanent tax savings.

At Regency Partners, our dedicated team of tax professionals is well-versed in tax planning strategies and can provide tailored guidance to help you make the most of the Stage 3 tax cuts. We understand the intricacies of the tax system and can assist you in identifying the best approaches to optimise your tax savings.

Contact us today to schedule a consultation and take advantage of this tax-saving opportunity.