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Self Managed Super Fund (SMSF) Article
Tax Goodies from the Budget

By Tony Negline.

This article may be out of date.

12th May 2007

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Over the next four financial years the Federal Government expects to deliver over $33 billion in tax cuts and additional concessions.

Seventy percent of the tax cuts will begin from July this year.  There are two parts to this tax cut: the low income tax rebate will be increased and the threshold when the 30% tax bracket kicks in will be moved to $30,000.  All taxpayers will receive some or all of this tax cut however the lower paid will receive the lion’s share.

The next tax cut which absorbs the remaining 30% of the total proposed cuts is only available to upper income earners from July 2008 and also comes in two parts.  The 40% tax bracket’s upper threshold will increased to $80,000 and secondly the 45% tax bracket will not apply until a person’s taxable income reaches $180,000.

To assess the real impact of these changes it is necessary to look at average tax rates – that is, how much tax on each dollar of income earned.  We need to look at average tax rates because our personal tax scales are progressive which means the rate of tax increases as a taxpayer’s income increases.  We get a more complete picture of a person’s real tax rate by looking at average rates.

In 1998 you paid 30% average tax if your taxable income was just under $56,000.  Once the latest tax changes have taken place the figure in 2007/08 will be $129,000 and in 2008/09 it will be $134,000.

Importantly the average tax rate will be 15% (ie the same tax rate applying to superannuation fund) at just under $39,000 in 2007/08 and 2008/09.  In 2006/07 this figure was $33,000 and in 1998 it was $21,000.

This data is best represented by the table:

Table of tax rates

The table shows impressive reductions in average tax rates over ten years.  Now it is true that these figures are for income tax only and ignore other taxes such as GST and the old Wholesale Sales Tax.  Complete and comprehensive comparisons between years are almost impossible because the tax system has changed so much over the last 25 years.

Those with incomes below $80,000 certainly do very well out of the government.  Recent tax office data shows that those with taxable income under $81,000 represent 92% of taxpayers yet only pay 61% of all net personal income taxes.  In rough terms these taxpayers gave the government an average of about $7,500 each in 2004/05.  The 8% of taxpayers who earn above $80,000 gave the tax office an average of $55,000 each.

The Federal Government relies on income taxes for the vast majority of its revenue.  The engine room of these tax collections are individuals with incomes between $80,000 and $400,000.  These people receive very few government hand-outs and also have very high marginal tax rates.  It is for this reason that we may never see a significant reduction in our high marginal tax rates because the government can’t afford to do this.  Moreover as the number of people with income above $80,000 is very small, they could never collectively really determine the outcome of an election.  Their ability to influence public policy for their own benefit is limited.

This helps explain why the majority of taxpayers, that is those on $80,000 or less, receive most of the government hand-outs such as family tax benefit, child care benefit and rebate and the government superannuation co-contribution.  It also helps explain why this group will receive 70% of the tax-cuts announced in this week’s budget.

The government hand-outs are really tax cuts by another name.  The size of these additional hand-outs should not be under-estimated.  For example lets look at a couple with two children, one aged under 5 and the other between 5 and 13.  One spouse earns $70,000 and the other $10,000.  Ignoring tax deductions and other income this couple should be expected to pay about $16,500 in income tax but thanks to the family tax benefit their tax bill is reduced by 37% to $10,500.

Family Tax Benefit recipients can elect to claim it from the Family Assistance Office either as regular payments or as an annual in arrears payment.  Alternatively a FTB claimant can be paid via reduced salary income tax deductions or once a year via the income tax return process.  For reasons best known to themselves most people elect to receive this payment from the FAO which means they are paying tax and having it returned to them via another government department.

If our couple uses child care then they will also be able to claim the Child Care Benefit and associated rebate.  Under current tax law the rebate is only paid after a person submits their tax return.  In the budget the government said it would pay this rebate via Centrelink and without the need to submit a tax return.  At the same time the size of the Child Care Benefit will be increased.  Let’s assume that our couple above use long term day care at an approved centre for 10 hours for one day per week for their younger child which costs them $50 per day.  Under current rules the government will meet about $35 of this cost.  From July 2007 the government subsidy will increase to about $38 – a 10% increase.  Most of these government payments are via the Child Care Benefit which is a subsidy paid directly to the child care company by Centrelink.  More tax cuts paid via bureaucratic handling.

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