The Australian tax system is a complex beast, and it's about to get even more so. The federal government is set to make changes to capital gains tax (CGT), negative gearing, and family trust rules in the upcoming budget. These changes will have a significant impact on how people earn their money and the tax they pay. Let's take a closer look at how income sources vary across different salary levels and what it means for the tax system.
The Income Breakdown
The Australia Institute's analysis of Australian Taxation Office data reveals a fascinating picture of income sources across different salary levels. Here's a breakdown of the six ways people make their money, based on income level:
- $0 to $60,000: Salaries or wages (73%), government pensions and allowances (7%), dividends and partnerships/trusts (3%), capital gains (1%), and 'other' (6%).
- $60,000 to $150,000: Salaries or wages (87%), government pensions and allowances (1%), dividends and partnerships/trusts (9%), capital gains (1%), and 'other' (2%).
- $150,000 to $250,000: Salaries or wages (76%), partnerships and trusts (9%), dividends (4%), capital gains (2%), and 'other' (3%).
- $250,000 to $1 million: Salaries or wages (57%), partnerships and trusts (13%), dividends (8%), capital gains (6%), and 'other' (4%).
- $1 million and above: Salaries or wages (18%), partnerships and trusts (24%), dividends (18%), capital gains (26%), and 'other' (6%).
The Tax Implications
What's interesting is how these income sources affect tax. As Greg Jericho, an Australia Institute economist, points out, the way top earners make their money makes it easier for them to minimise their tax. The current 50% CGT discount and complex tax arrangements through trusts allow them to pay lower tax rates than many workers on parts of their salaries.
This raises a deeper question: is the tax system equitable? The Grattan Institute's Erin-Lea Brown argues that the Australian tax system is 'falling down' in terms of equity. Income earned through one way is taxed very differently from the same amount earned through another. This is where the government's proposed changes to CGT and trusts come in.
The Role of Trusts
Trusts are a legal structure that offers families more flexibility and control, but they also provide opportunities to pay less tax. The ATO data shows that most income from trusts flows to the highest earners. This is a system that is essentially only open to the wealthy, who can afford to exist on investment income, while the rest of us are just working for a salary.
The Way Forward
The government needs to ensure it doesn't tilt the playing field too far against investment and towards consumption. Investment drives productivity growth, higher wages, and national saving. Every advanced economy taxes capital income at a lower rate than labour income. However, the current system may not be equitable, and changes are needed to rebalance the tax system.
In conclusion, the Australian tax system is a complex and evolving landscape. The proposed changes to CGT, negative gearing, and family trust rules will have a significant impact on how people earn their money and the tax they pay. It's crucial to understand these changes and their implications to ensure a fair and equitable tax system for all.
