Is genuine tax reform on the table this federal budget? (Source: AAP/Getty)
An accountant has sparked intense debate about what it’s really like to be a top income earner in Australia. While it certainly looks enviable on paper, being in the top 1 per cent comes with some pretty serious “costs”, he says.
The tax settings of the country are in the spotlight ahead of the federal budget expected in May. The government is considering changes to the discount it gives on capital gains tax for property investors while resisting calls to increase the GST on everyday goods and services.
Economists have long criticised what they see as Australia’s over reliance on taxing the personal income of workers and not doing enough to tax wealth.
According to accountant Kunal Batra, his client in Sydney is a perfect example, paying $325,000 in tax on a yearly income of $765,000.
“They have worked very hard to reach where they’re at, and that’s almost half of their income going away,” he told Yahoo Finance.
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His client works in tech and IT and lives with their partner and two children on Sydney’s north shore. While the seriously hefty salary puts them in the very top echelon of earners in the country, it also means about 43 per cent of it went to the ATO last financial year.
“Once you’re at that income bracket, most of the government services you’re not able to use,” Batra said.
His client paid $15,000 for the Medicare levy while also paying for private health insurance. And due to their high income, the family is ineligible for any childcare subsidy.
“So obviously they’re doing pretty well, but that also comes with a lot of costs,” he told Yahoo Finance.
Batra shared his client’s PAYG tax statement in a video on social media, arguing Australia’s tax system “is officially cooked”.
The clip has been watched more than 100,000 times in a few days sparking debate about the nature and fairness of current levels of income tax.
Batra said a common misconception among Aussies in the comments was how easy it is to avoid paying so much tax through the use of things like family trusts – something the ATO is currently cracking down on.
“There is very little options left at that income level, because there is a cap on how much you can contribute to your superannuation, and then if you go above that amount you have to pay another tax, which is called division 293,” he said.
“There is very little escape… the only thing left if buying a property which is losing money,” he added, referring to negative gearing in which the rent on a property doesn’t cover the borrowing costs and expenses, allowing the investor to claim the loss to reduce their tax bill.
“Essentially what that means is you’re losing 53 cents to gain 43 cents at tax time. So obviously that is not the best tax strategy. It can be a wealth strategy, but not the best tax strategy.”
RELATED: Australians are losing more of their income to tax than in decades
The account says his Sydney client’s tax bill show how much heavy lifting high income earners do. (Source: AAP/TikTok/allinoneaccounting)
The latest annual report from the Household, Income and Labour Dynamics in Australia (HILDA) survey released in September added fuel to the fire around the claim that too much of the tax burden is falling on Australian workers in their prime.
It showed that Aussies are now paying the highest average rate of income tax in more than two decades due to bracket creep because the tax brackets are not indexed to inflation.
On average, people aged 35 to 54 contribute the highest share of their salary to income taxes. It’s typically the same households that have mortgages and are currently asked to disproportionately shoulder the cost of getting inflation down through higher interest rates.
RELATED: ATO crackdown on income splitting strategy used by Aussies to lower tax
While Australia has long had a progressive style of income tax in which those who can afford to pay a higher rate of tax, Batra says he supports a more flat rate of income tax.
Under Scott Morrison, the former Coalition government’s stage 3 tax cuts sought to abolish the 37 per cent bracket and introduce a flat 30 per cent tax rate for anyone earning between $45,000 and $200,000. But that was mostly scrapped under the current Labor government.
The debate has raged for the better part of the past two decades. The fabled Henry Tax Review in 2010 by former Treasury Secretary Ken Henry, urged policy makers to reduce their heavy reliance on personal income tax, labelling the increasing burden on workers as an “intergenerational tragedy”.
Only a small handful of the 138 recommendations from the Henry Tax Review have been implemented as major tax reform policies has been largely stuck in the mud since Bill Shorten’s surprise defeat in 2019 after taking curbs on negative gearing, capital gains tax breaks and franking credits to the electorate.
With months left until Treasurer Jim Chalmers hands down the federal budget, speculation has been rife the government’s dominant electoral position will embolden it to make some long called for changes.
Strategic leaks to the media show it is considering reducing the capital gains tax discount for property investors in the future. The Greens are currently leading a parliamentary inquiry into the CGT discount, and are calling for a reduction to address housing inequality.
Meanwhile Chalmers has batted away calls from the International Monetary Fund this week for Australia to increase the GST on everyday items, saying “we’ve made it clear that we don’t intend to go down that path”.
The government has refused to shut down reports it was considering cutting the 50 per cent discount on investment properties to 33 or 25 per cent but when pressed this week the treasurer insisted he hadn’t committed to the measure.
RELATED: Controversial $10 billion push to tax inheritance in Australia
“We haven’t changed our policy, we’re rolling out income tax cuts and the standard deduction and the boost to the low-income superannuation tax offset, that’s our focus,” he said.
On Tuesday, Prime Minister Anthony Albanese also refused to rule out winding back the CGT concession and negative gearing to tackle intergenerational housing inequality.
“What we’re focused on is income tax cuts. That’s our focus on the tax system, and what we’re focused on in housing is supply,” he said, adding: “One of the issues that we are considering across the board is intergenerational equity.”
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