Why you can’t save your way to wealth- Pete Wargent

One of the reasons I advocate getting involved in property investment is that the rates of income tax in Australia are high, which makes it very difficult to become wealthy from a salary alone.

Let me explain…

The thresholds were changed for the 2013 financial year – while the tax free threshold is more generous than it has been previously, the marginal tax rates ramp up very quickly so that even taxable income of above just $37,000 begins to attract income tax at the marginal rate of 32.5%.

Thus, from that point onwards a third of more of your salary is likely to be deducted at source and winging its way to the coffers of the Australian Tax Office.

Threshold
Marginal tax rate
$18,001
19%
$37,001
32.5%
$80,001
37%
$180,001
45%

As the marginal tax rates operate on an increasing scale, those who earn above $80,000 per annum start to be punished heavily on their top slice of income. Note in the table below how the effective tax rate increases as you earn more money.

$
$
$
$
$
$
Gross salary
50,000
100,000
150,000
200,000
250,000
300,000
Income tax
7,797
24,947
43,447
63,547
86,047
108,547
Medicare levy
750
1,500
2,500
3,000
3,750
4,500
LITO
(250)
Total tax
8,297
26,647
45,647
66,547
89,795
113,047
Net pay
41,703
73,553
104,303
133,543
160,203
186,953
Effective tax rate
16.6%
26.6%
30.4%
33.3%
35.9%
37.7%

The effective tax rate rate of increase tapers off as the effective tax rate converges towards 46.5% (the 45% top bracket plus the 1.5% Medicare Levy.

Thus, for example, if you earned a salary of $10 million, your effective tax rate would be 46.2%, and if you somehow managed to earn a salary of $100 million, you would finally have achieved the fine distinction of an effective tax rate of 46.5%!

The implication of this is that while a larger income is obviously very useful, tax rates cut into your income substantially and as such it becomes difficult to build wealth through a salary alone.

Wise investment of your net salary is the solution.



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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