Bracket creep: The gift that keeps giving

Taxation Statistics 2012/13

• Fewer taxpayers: According to data from the Australian Tax Office, the number of individual taxpayers fell by 3.3 per cent in 2012/13 while non-taxable individuals rose by 12.4 per cent. The number of Australians filing tax returns rose by just 0.3 per cent in 2012/13.
• More pushed into higher tax brackets: There were 186,575 more taxpayers in the second highest tax bracket ($80,000 to $180,000) in 2012/13 and 46,450 more taxpayers in the top income bracket.
• Bracket creep: in 2012/13 there was an extra $14.1 billion in tax collected from those in the second highest and highest tax brackets than the previous year.
• Fewer negatively geared: The proportion of landlords claiming a loss on their rental properties has stabilised over the past five years.

What does it all mean?

• The tax threshold for the second highest and highest tax brackets haven’t changed since 2008/09. The second highest tax bracket kicks in at income levels above $80,000 and the top bracket kicks in at $180,000. And as income levels rise – admittedly at slower rates than in the past – more taxpayers are pushed into higher tax brackets (“bracket creep”).
• Data from the Tax Office (ATO) shows that there were more than 186,000 taxpayers in the second highest tax bracket in 2012/13 than the previous year and more than 46,000 more taxpayers in the top tax bracket. Tax paid from those in the top two tax brackets rose by $14.1 billion in 2012/13. Clearly more “ordinary” taxpayers would have been pushed into higher tax brackets in the past financial year and more will be pushed into higher tax brackets in this financial year.
• The Government may be constrained by the size of the budget deficit by cutting personal tax rates, but without changes to tax levels, more so-called ‘ordinary’ taxpayers will be paying more to the government. The latest data should escalate calls for tax reform – especially a shift from income tax to indirect tax such as the GST. More Australians are likely to warm to an environment where the GST rate is 15 per cent and the top tax rate is far lower, perhaps 25-30 cents in the dollar.
• In the low interest rate environment fewer landlords are claiming losses on their rental properties. Arguably there isn’t a better time to remove the incentive for negative gearing on new purchases of established dwellings by investors (but leaving in place provisions for new dwellings). Simply, fewer investors are motivated by tax considerations in purchasing rental dwellings so the impact on property markets arguably will be minimised.

What do the figures show?

• Almost 12.8 million Australians filed tax returns in 2012/13 with tax collected reaching almost $155 billion.
• In 2012/13, over 2.3 million Australians or almost 19 per cent of taxpayers were in the top tax brackets. Those in the top two tax brackets provided 67 per cent of all tax paid by individuals.
• The number of taxpayers in the top two tax brackets rose by 10.9 per cent in 2012/13 and tax paid rose by 15.8 per cent. There were 755,565 taxpayers with taxable incomes between $70,000 and $80,000 in 2012/13 that were at risk of moving into the second highest tax bracket.
• The proportion of taxpayers claiming a net loss on their rental properties fell from 66.8 per cent to 64.1 per cent in 2012/13. There were an estimated 1.97 million individual Australians that could be defined as “landlords” in 2012/13, or around 15 per cent of all people filing tax returns.

What is the importance of the economic data?

• The Australian Taxation Office releases detailed Taxation Statistics each year. The data can provide a range of perspectives on wealth, income and perspectives on fiscal policy.

What are the implications for interest rates and investors?

• More Australians are likely to be pushed into higher tax brackets in coming year. This is essentially a “free kick” for the government. Australians that are getting paid more or working harder or longer will be paying more tax to the government. Arguably high and stable tax rates stunts the desire to achieve higher incomes and deters people from moving into the workforce.
• The inquiry into the tax system needs to produce a range of solutions that encourages effort and productivity and attracts more workers into the workforce. Changes are necessary not just in a medium-term perspective but to lift economic momentum in the short term.