What’s actually happening today with property tax and others?
As we all know, taxes are an essential part of every modern government, whether from property or not. They fund services like healthcare, education, and infrastructure, again as we know. But in Australia, the taxation system also plays a crucial role in the distribution of wealth. However, some aspects of the system can contribute to maintaining economic inequality. In this essay, I will explain how taxes, despite their benefits, can trap people in poverty or prevent you from reaching your potential. We will examine specific tax laws and policies, and how they disproportionately impact middle-income Australians. They don’t just affect the ultra rich. They do impact property investors in Australia, big time!
Income Tax and Low-Income and middle-income Earners
Income tax is the most common tax paid by Australians. The system is progressive, meaning the higher your income, the more tax you pay. The Income Tax Assessment Act 1997 governs how income is taxed in Australia. The rates increase from 0% to 45%, depending on your income. While this seems fair, it can sometimes hurt lower income earners.
Low-income Australians face a marginal tax rate that rises sharply when they start earning more. For example, an individual who earns $18,200 or less pays no income tax. But if they earn more than this, they are taxed at 19% for earnings up to $45,000. This is a significant jump, especially when combined with other taxes. As George Orwell famously said, “In a time of deceit, telling the truth is a revolutionary act.” Likewise, addressing the flaws in the system can be seen as an essential truth. But as soon as you reach a certain amount, relatively low, about 50% goes to the tax man instead of helping you build your own wealth. I.e. why are you really working for past that point? Good question.
The Tax-Free Threshold and Welfare Cliffs
The tax-free threshold of $18,200 seems beneficial at first. However, for individuals on welfare, earning just above this amount can lead to what is called a “welfare cliff.” A welfare cliff occurs when a slight increase in income results in a disproportionate loss of welfare benefits. For example, those receiving unemployment benefits or family tax benefits may lose substantial financial support if they earn just a little more.
The Social Security Act 1991 specifies the conditions under which welfare payments are reduced or canceled. Welfare payments are phased out as income increases. This system creates a disincentive to work more because the extra income earned is often outweighed by the loss of benefits. As a result, individuals may choose to work less or remain unemployed to avoid losing essential financial support. This creates a poverty trap where working harder does not necessarily lead to more financial security. I have seen quite a few people that did not want to work more as they would lose their benefits!
Goods and Services Tax (GST)
The A New Tax System (Goods and Services Tax) Act 1999 introduced the Goods and Services Tax (GST) in Australia. This is a flat tax of 10% applied to most goods and services. While it is designed to be neutral, it disproportionately affects lower-income earners. Low-income households spend a higher percentage of their income on essentials like food, utilities, and clothing. Therefore, they end up paying a larger portion of their income in GST compared to high-income earners.
For instance, someone earning $30,000 a year might spend almost all of it on essential goods, paying GST on nearly every purchase. Meanwhile, someone earning $200,000 can save or invest much of their income, avoiding GST on a large portion of it. In this way, the GST can exacerbate income inequality by disproportionately affecting those who can least afford it. Some people believe that raising GST is the way forward. Would that really wipe out the middle class?
Superannuation Taxation
Superannuation is a long-term savings plan designed to help Australians save for retirement. Contributions to superannuation are taxed at a flat rate of 15% under the Superannuation Industry (Supervision) Act 1993. While this might seem fair, it benefits high-income earners more than low-income earners.
For a high-income earner, a 15% tax rate on super contributions is much lower than their marginal tax rate. Therefore, they save more on taxes by contributing to super. However, for low-income earners, the 15% tax rate on super contributions may not offer significant tax savings. Additionally, low-income earners often struggle to contribute to their super due to financial constraints. This leads to a situation where high-income earners are able to build larger retirement savings, further widening the wealth gap.
Obviously there are structures like SMSFs that change that for some.
Capital Gains Tax, property tax and Property Investment in Australia
The Income Tax Assessment Act 1997 also governs Capital Gains Tax (CGT) i.e. your property tax in australia. CGT is a tax on the profit made from selling assets such as property or shares. In Australia, if you hold an asset for more than 12 months, you are eligible for a 50% discount on the capital gains tax. This benefits wealthy individuals who invest in property and shares.
Many low- and middle-income Australians cannot afford to invest in property or shares. Therefore, they do not benefit from the CGT discount. Meanwhile, wealthy individuals can use the CGT discount to reduce their tax liability significantly. This allows them to accumulate even more wealth through investments, while those with lower incomes miss out on these opportunities. This situation is similar to the quote by Warren Buffet, “The rich are different from you and me.”
Negative Gearing and the Property Market – accountants love talking about this!
Negative gearing is another tax policy that benefits wealthy Australians more than others. It allows property investors to deduct losses made on rental properties from their taxable income. The Income Tax Assessment Act 1997 allows this practice, which effectively reduces the tax liability of investors. Wealthy individuals often use negative gearing to build large property portfolios, benefiting from tax deductions and capital gains over time.
For low- and middle-income Australians, the housing market becomes increasingly difficult to enter. As property prices rise due to demand from investors, first-time homebuyers find it harder to afford a home. This creates a wealth gap where property ownership becomes concentrated among the wealthy, while low-income individuals are left renting.
Fringe Benefits Tax
The Fringe Benefits Tax Assessment Act 1986 imposes a tax on non-cash benefits provided to employees, such as cars, housing, or entertainment. However, the tax rates and rules surrounding fringe benefits often allow high-income earners to receive generous perks from their employers, which are taxed at lower rates than their income. These benefits can include luxury cars or expensive travel, which lower-income employees are unlikely to receive. As a result, high-income earners end up with greater financial benefits that are taxed at a lower rate, while low-income workers do not receive similar advantages.
Payroll Tax
Payroll tax is another tax that can disproportionately affect low-wage workers. While it is paid by employers, the tax can indirectly lead to lower wages and fewer job opportunities. The Payroll Tax Act 2007 governs this tax, which is applied to businesses whose wages exceed a certain threshold. While the intent is to tax larger businesses, it can lead to unintended consequences. Small businesses may avoid hiring additional staff to stay below the payroll tax threshold, limiting job opportunities for low-income workers.
Additionally, businesses may pass the cost of payroll tax onto employees in the form of lower wages or reduced benefits. This affects low-wage workers the most, as they have less bargaining power to negotiate better pay or conditions. This situation can trap low-income individuals in low-paying jobs with limited opportunities for advancement.
Conclusion
The Australian taxation system, while designed to be progressive and fair, has several features that can keep low-income individuals in poverty – unless you know a good property tax accountant. Income tax brackets, welfare cliffs, GST, superannuation rules and property tax policies all contribute to maintaining some kind of economic inequality. These tax policies disproportionately affect low-income earners, while providing greater benefits to those with higher incomes. While taxes are necessary to fund essential services, reforming the system to reduce these inequalities is crucial to ensuring that all Australians have the opportunity to achieve financial stability. Some have figured out how to use that system to their advantage. Others are simply willing victims. The difference is simply the latter does not know any better. A large tragedy because of a small thing called knowledge.
References
Australian Government. Income Tax Assessment Act 1997. Canberra, Australia, 1997.
Australian Government. A New Tax System (Goods and Services Tax) Act 1999. Canberra, Australia, 1999.
Australian Government. Superannuation Industry (Supervision) Act 1993. Canberra, Australia, 1993.
Australian Government. Fringe Benefits Tax Assessment Act 1986. Canberra, Australia, 1986.
Australian Government. Payroll Tax Act 2007. Canberra, Australia, 2007.
Australian Government. Social Security Act 1991. Canberra, Australia, 1991.
Buffet, Warren. “The rich are different from you and me.” Forbes Magazine, 1987.
Orwell, George. 1984. Harcourt Brace Jovanovich, 1949.