Stage 3 tax cuts start in July: Which ASX stocks will benefit and which ones could lose?

Starting on July 1, the so-called stage 3 tax cuts will come into effect in Australia. These tax cuts, especially since they were altered by the Albanese government, will see a significant proportion of Australians with more money in their pocket – especially lower income earners.

What are the Stage 3 tax cuts? What do they involve?

Those with incomes between $18,000 and $45,000 will see a tax cut from 19% to 16%, those between $45,000 and $135,000 will see a cut from 32-37% to 30%. The original plan was for a flat 30% rate between $45,000 and $200,000.

But, in changes made by the government, those between $135,000 and $180,000 will pay 37% and those above $180,000 will pay 45% on their income within the thresholds, but will still see a tax cut because they will be taxed less on their money earned up to the higher thresholds.

There has been a lot of debate about whether or not the changes to Stage 3 will turn out to be a good move politically and what impact it will have on inflation and the RBA’s push top get it under control – meaning within 2-3%. In this article, we thought we would look at which stocks might see a windfall when they come into place.

Which stocks will win from the Stage 3 tax cuts?

In general, we see retailers as having potential to gain from Stage 3, especially discretionary retailers that have struggled as consumers felt the pinch. We two stocks in particular.

The first of these is Universal Store (ASX:UNI), a casual fashion outlet focused on Millennial and Gen Z customers, who will see a bigger boost to their incomes than they would have under the original Stage 3 tax cuts.

The second of these is JB Hi-Fi (ASX:JBH). Now yes, this company has not gone that badly, but many investors may forget the electronic retailer also owns white goods retailer The Good Guys, since buying it for nearly $900m in 2016. It bought at the top of the cycle and this division has been struggling in recent months – sales in the September quarter of FY24 (1Q24) fell over 12%. While it did not release specific results for the December quarter, revenue for the two quarters combined (the first half or 1HY24) fell 10%, while EBIT fell 30%.

We also see non-bank Mortgage lenders as having potential to gain when the Stage 3 tax cuts are implemented. This is because many of them serve lower income customers than the big banks. We see secondary banks like Bendigo Bank (ASX:BEN), Bank of Queensland (ASX:BOQ) as well as non-bank lenders like Pepper (ASX:PPM), Latitude (ASX:LFS) and Liberty (ASX:LFG) as gaining from Stage 3, as customers incomes increase and existing customers become less likely to default while would-be customers become eligible when they otherwise wouldn’t have been.

Which stocks will lose from the Stage 3 tax cuts?

In our view, luxury good stocks may ‘lose’. By ‘lose’ we don’t necessarily mean they will see falling revenue and profits – they may still see growth.

However, they might not see the same growth than they would if the original Stage 3 tax cuts remained – those in the highest income brackets will see only ~$4,500 as opposed to $9,000. Those higher income earners will still be well-off, but they might have to be more picky about their discretionary spending.

One specific ASX company might be Cettire (ASX:CTT), an eCommerce outlet that is focused on luxury goods. It has experienced significant growth since its IPO, so is at particular risk of growth slowing.

We would count travel stocks like Flight Centre (ASX:FLT) and Webjet (ASX:WEB) as possible ‘losers’ from Stage 3. Now yes, both stocks (and other travel stocks) may see more income from lower-income earners but less income from higher-income earners. These stocks have proven resilient to cost of living pressures as either consumers have prioritised travel, or just enough higher-income earners to make up for lower-income earners – better to make more money from less customers than to make less money from more customers.

Holidays to Europe do not come cheap, and $4,500 less in higher income peoples’ pockets due to the Stage 3 tax cuts may mean they will go to cheaper destinations (like South-East Asia) instead. And don’t try and persuade us travel agents can make money getting 1% commission on $80 return Jetstar flights between Sydney, the Gold Coast and Avalon, at least as much as they do from European summer getaways – or even as much as they did in the pre-COVID days of 5% commissions.

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