Will home buyers benefit from stage 3 tax cuts?
As financial year 2023–24 draws to a close, taxpayers must consider to what degree they will benefit from the upcoming tax revisions coming into effect on 1 July.
Ahead of the implementation of the upcoming stage three tax cuts, chief economist at PRD Real Estate Dr Diaswati Mardiasmo has crunched the numbers as to whether the tax-related reform will succeed in assisting with cost of living difficulties.
With the upcoming stage three tax cuts first revealed in the government’s federal budget for 2024, Mardiasmo noted that these revisions are the main cost of living measure put forward by the government as mortgage repayments and property prices continue to climb.
The logistics of the stage three tax cuts:
Mardiasmo detailed that these stage three tax cuts will affect approximately 13.6 million Australians and have been “designed to improve a person’s disposable income”.
The stage three tax cuts bracket, set to come into effect on 1 July, are as follows:
- Earn up to $18,200 – pay no tax.
- Pay a 16 per cent tax rate on each dollar earned between $18,201 and $45,000.
- Pay a 30 per cent tax rate on each dollar earned between $45,001 and $135,000.
- Pay a 37 per cent tax rate on each dollar earned between $135,001 and $190,000.
- Pay a 45 per cent tax rate on each dollar earned above $190,000.
The chief economist relayed that access to increased disposable income would present households with a variety of options; prospective buyers will benefit from increased borrowing power and capacity for mortgage repayments, and existing home owners will be able to make extra repayments on their loan or deposit into their mortgage offset account.
“A person earning (and thus a taxable income) of $120,000 has a borrowing power of $615,135.51 in FY2023–2024. With stage three tax cuts, this increases to $642,197.44 in FY2024–25.”
“This is a significant increase of $27,061.93, or 4.4 per cent. Those earning top dollar of $140,000 and above will still see the largest benefit, with their maximum borrowing power increasing by at least 5.36 per cent.”
“Assuming the maximum borrowing represents 80 per cent of the purchase price, based on a standard
minimum 20 per cent deposit (to avoid lenders’ mortgage insurance), this brings up the purchase price
from $768,919 to $802,747,” explained Mardiasmo.
Mardiasmo clarified that these figures do not take into account stamp duty, legal fees, grants, scheme incentives available to buyers, and other associated costs and incentives involved in the home buying process.
Nonetheless, she surmised that the amount saved in taxes would still proportionally grow as one’s taxable income bracket grows higher, marking a greater difference in the maximum borrowing capacity between FY2023–24 and FY2024–25.
Will the tax cuts enable greater access to the property market?
Mardiasmo stated that the disposable income on offer through stage three tax cuts is “quite impressive”, with prospective buyers earning $120,000 now able to “consider a property listed in the early $800,000s, as opposed to the mid-$700,000s”.
However, she cautioned that the tax cuts from a property perspective will “not make a significant difference, as the percentage increase in access to the market is somewhat small, between 5 to 7 per cent, and will mostly be felt by those earning a higher income ($120,000 and more)”.
Even with this diminished market access, she said the tax cuts will “make some difference, especially regarding a home buyer’s hopes and positive sentiment”.
“Combined with a stable interest rate, currently at 4.35 per cent, and the outlook for stability (both in employment/wage growth and cash rate), the stage three tax cuts might just be what is needed to turn a cautious buyer into a signed contract,” the chief economist concluded.