Stage 3 tax cuts are now law, and they come into effect on 1 July 2024, reshaping pay packets and paperwork for small businesses across Australia. This comprehensive guide explains what the new rates mean for your business, why they matter for your payroll and bookkeeping systems, and how to make the transition smooth for your team and your bottom line.
Why the Stage 3 Tax Cuts Matter for Small Businesses
The revised Stage 3 tax cuts were legislated on 5 March 2024, giving every one of Australia’s 13.6 million taxpayers a reduction in their income tax. For small business owners, the shift goes beyond employee take-home pay. It changes your withholding obligations, affects cash-flow forecasting, and requires prompt software updates to keep you compliant.
The Albanese government redesigned these tax cuts to help middle income earners cope with cost of living pressures. Unlike the original plan that heavily favoured highest income earners, the new approach provides bigger tax cuts to more people earning under $200,000 annually.
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A Quick Recap of the New Tax Brackets
From 1 July 2024, the individual resident tax brackets become:
$0 – $18,200 – 0%
$18,201 – $45,000 – 16%
$45,001 – $135,000 – 30%
$135,001 – $190,000 – 37%
$190,001 + – 45%
Compared with 2023-24, middle income earners receive larger cuts, while those on highest incomes still benefit but to a lesser extent.
Flow-On Effects for Cash Flow
Average income workers on about $73,000 will keep an extra $1,504 a year. While that is good news for employees, it also means less Pay As You Go (PAYG) withholding is remitted to the Australian Taxation Office (ATO) each pay cycle, marginally lifting the cash held in your business bank account. Adjust budgets accordingly so the extra liquidity does not mask underlying trading issues.
Impact on Staff Retention
The cut is worth $804 for someone on $45,000, $2,179 for an employee on $100,000, and $3,729 for a team member on $150,000. Framing the change in positive terms can boost morale at a time when cost of living pressures are affecting many australians. Clear communication helps staff appreciate that the increase in their take home pay stems from tax reform, not an employer error.
Payroll Adjustments You Need to Make
The ATO released new Pay As You Go (PAYG) withholding formulas that apply to all payments from 1 July 2024. Employers must ensure their payroll systems adopt those rates, so the correct tax is withheld from employees’ pay.
Update Your Software and Tax Tables
Most payroll providers push automatic updates for the new tax rates. However, you still need to verify the changes:
Cloud and desktop payroll solutions: Log in after 1 July and confirm that version numbers and tax tables show the 2024-25 scales.
In-house spreadsheets: Manually replace formulas with the ATO coefficients from Schedule 1.
Point-of-sale systems with integrated payroll: Check that both the front-end and back-office modules have refreshed withholding settings.
The ATO advises that employees may notice the new rates in their pay within days or weeks, depending on how quickly each employer updates its system. Any tax withheld under the old scales will be reconciled in the employee’s 2025 tax return.
What if your update is delayed?
Employers who cannot meet the deadline must apply the new scales to the first pay run processed after upgrading. Keep records of the date the new tables went live to explain any short-term changes to withholding amounts.
Review Employee PAYG Withholding
After the tables change, you need to monitor several key areas:
Reconcile PAYG accounts monthly to confirm the withheld amounts align with the updated schedules.
For directors’ fees, allowances, or bonuses paid after 1 July 2024, apply the 2024-25 marginal rates even if the work was performed earlier.
Check that voluntary extra withholding arrangements made by employees remain appropriate. Some staff may wish to reduce additional tax deductions because standard withholding has fallen.
Align Single Touch Payroll Reporting
Single Touch Payroll (STP) submissions transmit year-to-date salary and withholding data after each pay event. If your payroll tables lag behind, STP will keep reporting the higher, pre-cut withholding, potentially triggering ATO queries. Make sure your STP software reflects the 2024-25 tax scales the same day you update payroll.
Bookkeeping and Budgeting Implications
Lower withholding is only one piece of the bigger bookkeeping puzzle. The rate changes influence forecasts, Business Activity Statements (BAS) and end-of-year reconciliations.
Revisiting Forecasts
New take home pay means staff might request salary packaging reviews. Adjust fringe benefits budgets if employees choose to redirect some of their extra cash into novated leases or additional superannuation. Any shift in remuneration mix affects Fringe Benefits Tax (FBT) calculations for 2024-25.
Consider the broader economic context too. Many australians are still feeling the impact of cost of living pressures, and these tax cuts provide some relief to middle income workers. This additional disposable income might affect employee expectations around future pay rises and benefits.
PAYG Instalments and BAS
Many sole traders and small-company directors pay quarterly PAYG instalments based on last year’s tax liability. The lower rates will reduce tax, so consider varying instalments to avoid over-payment. Lodge variations early in the quarter to match cash flow with the updated tax liability.
Year-End Reconciliations and Over-Withholding
If you updated late and withheld too much during the first few pay cycles, that surplus will be refunded through employees’ 2025 income tax assessments. Keep a spreadsheet of pay periods processed on old tables so you can explain variances should staff ask.
Practical Tips to Stay Compliant and Confident
Small businesses face extra paperwork each time tax settings shift, and the Stage 3 changes create additional compliance costs for employers. The following steps streamline the process.
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Timelines and Checklist
Here are the key dates and simple steps to help your business stay on track with payroll and bookkeeping adjustments during the rollout of the Stage 3 tax cuts.
Before 30 June 2024 – Backup payroll data; notify your software provider of any custom settings that may need retesting.
1 July 2024 – Install updates and run a test pay-run in a sandbox environment.
First live pay after 1 July – Cross-check a sample employee’s withholding against the ATO tax withheld calculator to verify accuracy.
First BAS of 2024-25 – Compare PAYG payable to the same quarter last year; a decrease should be expected.
October payroll review – Audit STP figures and ensure year-to-date totals match payslips.
Communicating with Employees
Workers will see a larger net amount but may worry about an under-withholding mistake. Send a brief email explaining the Stage 3 changes, the new marginal rates, and linking to the Treasury fact sheet for credibility. Reinforce that the change is automatic and that no action is required from staff.
The tax cuts provide meaningful relief to middle income earners who have been under pressure from rising costs. Frame the changes positively, emphasising that the government has designed these cuts to help with cost of living pressures that affect many people across different income brackets.
When to Seek Professional Help
Contact an accountant if you:
Use bespoke payroll code and cannot locate the correct coefficients.
Need to re-engineer salary-sacrifice arrangements linked to previous tax brackets.
Plan to vary PAYG instalments significantly and want assurance that the variation is reasonable.
Understanding the Bigger Picture
The Stage 3 tax cuts are part of a broader government strategy to address cost of living pressures while managing bracket creep. Bracket creep occurs when inflation and wage growth push taxpayers into higher tax brackets, effectively increasing their tax burden without formal rate increases.
These revised cuts benefit middle income earners most, providing larger tax relief to those earning between $18,201 and $135,000. The changes also support women in the workforce, with 90 per cent of women taxpayers receiving a bigger tax cut compared to the original plan.
For small business owners, understanding these changes helps you make informed decisions about salary packaging, superannuation contributions, and workforce planning. The extra disposable income in workers’ pockets may also boost consumer spending, potentially benefiting your business through increased demand.
Conclusion: Turning Change into Opportunity
The Stage 3 tax cuts ease cost of living pressure for employees and give small businesses a brief window of improved cash flow. By updating payroll tables promptly, fine-tuning bookkeeping processes, and communicating clearly with staff, you transform legislative change into operational confidence.
The government’s decision to redesign these cuts reflects the reality that many Australians continue to face significant cost pressures across housing, food, and energy costs. These tax cuts provide real relief to middle income workers while maintaining the progressive nature of Australia’s tax system.
If you would like personalised guidance or a payroll health check, reach out to the friendly team at ACT Bookkeeping today. We are here to ensure your business runs smoothly, so you can stay focused on growth while we handle the numbers. How will you use the savings generated by the Stage 3 tax cuts to strengthen your business this year?
