Are you paying more than your fair share of tax?

What would you say if I told you that less than 10% of us pays around  50% of the country’s tax bill?

Now that’s very different from what you tend to read isn’t it?

You know…things like the rich don’t pay their fare share of tax, or greedy rich property investors take advantage of negative gearing.

The degree of ignorance about the distribution of tax across households is remarkable, especially given that the truth is so easily and freely accessible from the ATOAre you paying more

We all know that our standard of living and lifestyle, the services the government can provide and the infrastructure that they build is dependent on the amount of taxes that are collected, so they question is really who is paying this and is the system fair?

Getting the balance right between providing the right incentives for the entrepreneur to take the higher risks associated with businesses which provides jobs for millions of people; or property investing which provides shelter for those who can’t afford to or choose not to buy their own home; and taxes is fundamental to this.

It’s a juggling game and even in the recent budget the Treasurer only fiddled around the edges.

Getting the balance right not to disincentivise hard work by over taxing the higher income earners is a sensitive issue.

We will always have the two extremes…

The extremely wealthy and those despite being offered the same opportunities who always find themselves at the other end.

However it’s when the middle class, the “average Australian”, feels that the system is not fair, that we will see major political movements.

In the meantime we live in one of the wealthiest and safest countries in the world and there are many people who would swap places with us in a heart beat.

However our current tax system causes the top 10% of income earners to pay more than half our taxes.

Yes it’s true and I’ll explain more in a moment, but it underpins the concept that one of the most important aspects of becoming a professional property investor is establishing optimal ownership structures.

While I would never suggest choosing a particular ownership structure just to minimise your tax (that’s not only stupid, but it’s illegal) there are significant taxation implications depending on how you own your investment properties.

And of course certain structures help reduce your risk exposure whilst maximising your portfolio’s wealth creation capacity.

Now let me warn you about two things:

  1. There’s lots of numbers and figures in this article, but please bear with me. Firstly I think you’ll read some statistics that are likely to amaze you and, more importantly, you may get some ideas that could save you a heap of money.
  2. I’m not licensed to advise on financial or tax matters, but it’s likely that what you are about to read will make you seek appropriate advice.

So who pays the taxes in Australia? 
Wealth Retreat 2018 - General

While we all like to have a gripe about how frequently the A.T.O. dips into our pockets to line Canberra’s coffers,  most of us don’t really know where all that revenue is coming from?

In fact, you’ve probably never put much thought to the matter.

However, you might be a little more interested in the topic of tax (and the potential to legally reduce your tax bill) as I further explain how around 10% of the population in Australia pays most of the tax contributed by individuals.

Now this is a figure that has been bandied around for a while, but a study reported in The Conversation a few years ago once again confirmed that the top 10% (those with taxable incomes beyond $102,000 per annum) pay around 52% of all personal income taxation.

pay more tax2

 

 

Now that’s interesting, isn’t it? 

I first read similar stats a few years ago and they’re much the same today according to the ATO.calculator coin money save debt

So where does our tax revenue come from?

In Australia, all individuals, companies, trusts and any other income earning entities are legally required to pay taxes, so that we can pay for the essential services, infrastructure and the management of our country by those we elect to run it on our behalf.

Then there are additional taxes like GST, excises, superannuation and fringe benefits tax.

Income and company tax make up around 70% of all ATO revenue, followed by GST at 16% and other combined taxes contributing the remaining 14% or so.

Given that, as a property investor, you are probably concerned with your personal taxation obligation to the government, let’s look at what the ATO says about investors…

How many properties did individual taxpayers own?

The most recent ATO stats show that just over 2 million Australians own at least one investment property.

While you and I probably red a lot about investment property, most Australians don’t – these figures show that if there were 100 Australians, 16 would own an investment property but  84 don’t!

Boiling it down further, of every 100 property investors :

  • 71 own just 1 investment property
  • 19 own 2 properties
  • 6 own 3 properties
  • 2 own 4 properties (118,412 Australians)
  • 1 owned 5 properties (37,213 Australian)
  • 1 owned 6 or more properties (19,198 Australians)

And the chart below from the ATO shows similar data in the previous tax years:

 Individuals – interest in a rental property, by overall net rent outcome, 2014–15 to 2015–16 income years
Property interests 2014–15 2015–16
Net rent loss Net rent neutral/ profit Total individuals Net rent loss Net rent neutral/ profit Total individuals
1 912,534 556,409 1,468,943

917,457

577,380

1,494,837

2 235,856 147,646 383,502

242,211

153,713

395,924

3 70,423 47,990 118,413

72,733

49,906

122,639

4 24,882 18,356 43,238

25,994

19,168

45,162

5 10,428 7,803 18,231

10,758

8,105

18,863

6 or more 10,801 8,397 19,198

11,296

8,671

19,967

Total 1,264,924 786,601 2,051,525

1,280,449

816,943

2,097,392

Note
An interest in a property means the property is solely owned, jointly owned or part-year owned – for example, bought or sold a property during the year.

Here’s another chart from the ATO showing how over the last 5 tax years in general:

  • The rental income received by property investors progressively increased each year.
  • The interest paid by these investors decreased (interest rates have fallen)
  • Property investors spent more on capital works each year (improving their properties)
  • Property investors claimed more (legal) tax deductions each year)

Rental income and deductions

 If you want to set up your own significant property investment business, one that could one day replace your personal exertion income, then you should really consider joining us at Wealth Retreat 2018.

 We give you a blue print to build your own property investment and then give you a tool box full of Power Tools to help you build it. 

Find out more  Click here find out more and register your interest online to find out more or email Jo Fitt [email protected] and she’ll explain everything.

But these figures will astound you!

The table below indicates taxable income assessed according to the various tax scale ranges, and highlights that;

  • 2.7% of all taxpayers or 1.35% of the overall population paid 26.2% of all individual income tax; and
  • Another 17.2% of all taxpayers or 8.6% of the population, paid an additional 35.4% of individual income tax collected across 2010/2011.

In other words…

While less than 10% of the entire population paid more than 60% of all individual tax collected ($101.7 billion) during this period, 65% of the overall population contributed to less than 4% of the ATO’s income tax revenue for that year.

So, where do you fit in and are you paying more than your fair share?

Where do you fit in and are you paying more than your fair share

Company Taxes

When we compare individual income tax with company tax (ignoring for the purpose of this exercise other forms of tax like trusts, super funds and GST), the combined revenue raked in by the ATO from these entities, which often boast a massive asset base and annual turnover, is less than half of that contributed by individual taxpayers. 

Wealth Retreat 2018 - Ken Raiss

Company returns comprised 5.3% of all tax returns for that period (a total of 788,983), with combined gross earnings reported of $3,440 billion.

But after the myriad of deductions, concessions and offsets these companies are afforded due to the structure in which they operate (a total of $2,201 billion in tax write offs to be exact!), their combined tax obligation was just $61.7 billion!

Remember, this is compared to what was forked out by approximately 9.4 million individual taxpayers at around $133.1 billion or 48% of all revenue collected.

The figures I’m quoting are from the ATO for the 2010-11 tax year but new research has revealed 76 of Australia’s biggest multinationals pay an average effective tax rate of just 16.2% – half the corporate tax rate (30%) in the 2013-4 tax year

It has also discovered the Commonwealth Government lost $5.4bn in potential tax revenue in 2013 and 2014 from those same companies, as they shifted billions of dollars in profits offshore.

It gets better (if you own a company!)…

Of these companies, 14% were assessed as making a loss after deductions and therefore managed to avoid any tax obligation whatsoever, after deductions.

Jaw dropping isn’t it?

Let’s think about that for a minute.

Essentially, all companies of all shapes and sizes across Australia, including those multi-national giants, contributed just 22% to Canberra’s coffers, while the top 10% of income earners contributed 37%.

If you are not sufficiently surprised just reading through the numbers, here is a pie chart that clearly demonstrated how Australia’s tax base is significantly skewed when it comes to who the government is collecting their revenue from.

Total revenue 2010-2011

A few final thoughts

I know there are a lot of numbers, figures and percentages to wrap your head around here and you may think I’ve highlighted what, at first glance, appears to be a very inequitable system just to get you worked into some kind of self-righteous frenzy.Tax return

However, this is not all the case…

Rather, it’s all about perspective.

Firstly we must recognise that without a tax system which makes doing business in our country profitable by way of reasonable, well targeted & structured tax breaks to enable companies to survive as viable enterprises, many would simply move their operations offshore, meaning significantly less employees hired and less salaries paid from which Income Tax revenue could be collected.

A viable, strong business sector is essential to keep employment levels high and allow us maintain the lifestyles to which many of us have become accustomed.

Not to mention paying for the essential services and vital infrastructure that lends itself to the comfortable “lucky country” existence which many of us take for granted.

Additionally, in a society where we have come to expect a significant number of government funded services to cushion the blow following natural disasters and assist those less fortunate, we must recognise that the revenue to pay for these schemes has to come from somewhere.

What I would like you to take from this revealing exercise is…

How you are structuring the ownership of assets within your portfolio

The importance to reflect on how you are structuring the ownership of assets within your portfolio.

Our system favours property investors who run their portfolio’s like a business and own the properties in the correct entities. In fact owning properties in your own name may mean you could be missing out on many legitimate claims to legally reduce your tax.

Maybe that’s something worth considering and seeking professional advice about?

I hope you’ve found these insights helped give you some ideas about your own wealth creation.

That’s one of the major reasons we spend a large part of our 5 day Wealth Retreat on running your property investments like a business and you’ll be taught the right systems structures and strategies by appropriately qualified accountants, lawyers and financial planners.

But there’s much, much more to Wealth Retreat that just property money and tax.

Just click here now and find out all about Australia’s ultimate learning & networking event for investors & entrepreneurs.

So what is it beyond the money that pushes and prods and sparks and motivates you to perform at your best and to build and dream and dare?

When I asked people at Wealth Retreat what drove them here are their top two answers:

Number One: Making a difference. To touch the lives of other people. They want to give back to people and causes that are so much bigger than they themselves are. They believe that as they receive they need to “pay it forward” to the next generation of business owners or investors. How are you paying it forward?

Number Two: To care for their friends and family and provide an amazing lifestyle and quality of life for them, and especially to have the time to be with them.

Have you ever wished you could join us at Wealth Retreat? 

Wealth Retreat 2018 - Pete Wargent

While the numbers are limited (on purpose) I urge you to call my assistant Jo Fitt on 03 9591 8888 and find out more and see if you qualify to join us on the Gold Coast on June 9th – 13th 2018.

Or email her at [email protected] to get the process started. We have a very limited number of spaces for the event and with over 35% of spots already taken it’s only going to get harder and harder to get in later.

By the way, when you attend you’ll be covered by my personal satisfaction guarantee, so the risk is on me!

If you would like to find out a little more check out our website by clicking here.

If you’re ready to commit to playing at a higher level, to spending 5 days with a select handful of other doers in an environment that will challenge and push you to even higher levels of achievement and success, then please call Jo on 03 9591 8888 or email her at [email protected] and ask her to explain a bit more about Wealth Retreat and get on the interview list.

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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Are you paying more than your fair share of tax?' have 6 comments

  1. Avatar for Property Update

    April 26, 2016 Ray

    Looking at Table 3, 19.9% (top 2 bracket) paid 61.6% of the net tax payable. So not 10% paid 60% claimed but roughly 20% paid 60%. Or I am not looking at it correctly.

    Reply

    • Avatar for Property Update

      April 25, 2017 Yogo

      You forgot that only half the population pays tax, so when you halve the 19.9% percentage of taxpayers, you get roughly 10% of the population.

      Reply

  2. Avatar for Property Update

    April 23, 2016 Brian

    Hi Michael,
    Thank you for a very interesting article – recently I attended a “Property Club” Information evening and the Presenters there were telling the audience that it was best to own Properties in your own name ( as does Kevin Young, Founder of Property Club does – I’m told). Your article indicates ownership of properties is best in a Company or Trust which can confuse us novices. I understand every body’s circumstances can be quite different but nevertheless can be confusing since all we are trying to do is manage our ‘hard earned’ with caution and responsibly. As I understand, setting up and maintaining a Company (or Trust) is an ongoing expense to an enterprise.

    Reply

    • Avatar for Property Update

      April 23, 2016 Michael Yardney

      Brian
      This Blog was not tax advice, and as you say, everyone’s situation is different
      Firstly it’s not wise to own investment properties in a company. You won’t get CGT benefits, but most wealthy people own nothing in their own names and control their assets through trusts.
      Now that’s interesting
      So begin with the end in mind – what will your portfolio look like in 10-15 years? How many properties will you own?
      If it’s only 1 or 2 like most investors it’s unlikely a trust will be of benefit to you.
      If you intend to be one of the wealthy investors chose your advisors carefully. Make sure they give you the advice the successful investors pay for. Free advice is often worth what it cost you

      Reply

  3. Avatar for Property Update

    April 11, 2015 KEVIN WILSON

    All Australia needs is a Transaction Tax of 5% on all sales made plus a 2.5% on all bank transactions with NO claim backs at all – Take away all income Tax as Australia has a annually turn over of over $20 trillion and this would also overcome our problems we have HTT
    Hope someone reads this Kevin Wilson

    Reply


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