When it comes to working out the impact of the carbon tax on your financial situation, it’s important to know what tax bracket you’re in, writes Julia Hartman.
If you’re close to the bottom of your tax bracket then an additional property expense or negatively geared property will put you into a lower tax bracket, decreasing the amount the Australian Tax Office (ATO) will contribute to your holding costs. If possible, this may be a good reason to delay expenditure.
It’s also important to think carefully about whose name to buy a property in, as the higher income earner may already be negatively geared into the same bracket as the lower income earner. In these circumstances consider putting the property in the lower income earner’s name, as they’ll get exactly the same contribution from the ATO but have a lot more room to absorb capital gain.
Generally the objective is to aim to have both members of a couple in the same tax bracket. Once this happens there’s no further tax benefit of shifting income from one to the other. There’s an exemption to this rule; when one spouse is pushed over the low income tax offset upper threshold.
The effect of this is shown in Table 1 below where a higher income results in an effectively lower rate. The carbon tax has considerably increased the tax-free threshold which all taxpayers are entitled to and decreased the low income tax offset.
Don’t read Table 1 as you would at a normal tax bracket table. This looks at your total income and what tax rate applies to the last dollar you earn. These aren’t stepped up rates but the actual rate you pay on your last dollar if your net taxable income is the amount below, in Table 1.
The way the table works is, for example if you earn $37,001 in 2012/13 then that last dollar would have an effective tax rate of 34 per cent under the old rules, and it’s the same under the new rates but leading up to that the old tax rate would have been 15 per cent. It’s now 19 per cent.
The figures in bold are the new tax rates proposed as part of the carbon tax measures. The other figures are the tax rates we would have had if nothing had changed from those promised in the 2007 election campaign. The effect of the low income tax offset is also taken into account, which is why there are so many brackets and why in some cases the rate decreases as the income increases.
The information generally available is only comparing the carbon tax rates with the current year tax rates. The tax rate promises of the 2007 election campaign, where John Howard lost to Kevin Rudd, saw low income earners receive the tax cuts first, with the tax cuts for high income earners scheduled to kick in about now.
As you can see in Table 2, these 2007promised tax cuts would have resulted in high income earners being considerably better off, before the carbon tax rates, by more than $10,000 per year on $250,000. The plan originally was that in 2013/14 you wouldn’t leave the 19 per cent tax bracket until your income reached $82,501, but now that will happen at $67,001 in 2015/16.
The tax rate increases as a result of the government’s carbon tax plans are much higher when you compare them with the promised and much anticipated tax cuts due to start next year.
Numbers too much?
Well, if you’re a high income earner you might like to know that Kevin Rudd and John Howard both promised that by 2012/13 people on more than $180,000 per year would only pay a maximum tax rate of 40 per cent. The argument was actually based on the fact that high income earners would afford to wait and low income earners got the benefit of the early round of tax cuts.
The tax rates introduced by the carbon tax reforms have removed the promised 40 per cent maximum tax bracket for the next financial year and replaced it with a 45 per cent one.
Source : Australian Property Investor: September 2011