By Brian Toohey, Sun Herald, 21st March 1999
There are 170 Australians honest enough to declare taxable income of more than Au$2 million a year. Yet they still manage to get their average rate of net tax below what someone on average weekly earnings has to pay.
More than half the nation's companies do even better - they pay no tax at all.
According to tax statistics released last week, 661 multimillionaires were hones enough to declare a taxable income of Au$1 million in 1996-97, while 3,065 declared taxable income of more than Au$500,000 a year.
Many other millionaires use fancy tax-avoidance schemes to cut their taxable income far below what they really earn. A Tax Office survey a few years ago found that a significant proportion of people on BRW magazine's Rich List claimed to have a taxable income below the minimum wage.
But even those who declared high incomes don't do to badly once various rebates and credits are taken into account. According to the latest figures people with a taxable income of more than Au$2 million a year paid only 21.3% in net tax.
This compares with 24.7% for those in the Au$38,000 to Au$40,000 bracket which covers average weekly male earnings. Those on Au$80,000 to Au$90,000 a year paid an average rate of net tax of 32.8% while those on Au$1 million to Au$2 million paid just 28.9%.
The figures highlight the way the super rich were the great beneficiaries of changes introduced when Paul Keating was treasurer. He lopped 13 cents in the dollar off the top marginal rate of tax applying when John Howard was Treasurer in the Fraser government. Keating also introduced the dividend imputation system which slashed the amount of tax paid on income from shares.
The latest statistics, however, suggest that many wealthy Australians have been trying to reduce their tax even more by channelling money through vehicles such as trusts and private companies. The figures help explain why the Howard government's tax reform package is trying to extract more tax from trusts without cracking down so hard as to really upset its own constituency.
According to the latest statistics, the number of tax payers increased by only 6.3% in the five years to 1996-97 but the number of trusts rocketed by 39.7%. The number of companies increased by 31.1% with private firms accounting for nearly all these increases.
Trusts currently don't pay tax. Any tax becomes payable only in the hands of those to whom the trust distributes money. The Tax Office has repeatedly warned that the rapid growth of trusts in recent years can be explained by the way their special tax status creates myriad opportunities for avoidance.
As a result, the Government is planning to tax some trusts at the company tax rate of 36%. But it has already agreed to exempt a wide range of family trusts and is under intense pressure to exempt other types of trusts.
The move to tax some trusts as companies is generally seen as a useful step towards catching revenue which is escaping the net. But the strong growth in private companies in recent years suggests that the 36% tax rate is not regarded as too onerous, provided little or no profit is declared.
In fact, 58% of the nation's 560,000 companies paid zero tax in 1996-97. Another 54,000 paid less than Au$1,000.
On the other hand, the amount of tax paid on capital gains has increased by a spectacular 695% over the past decade.
Although the increase was off a fairly small base, revenue from capital gains was Au$2.1 billion in 1996-97.
Because of the current stockmarket boom - and the surge in the number of Australians owning shares - revenue should be even stronger by now.
About 80% of the capital gains tax paid by individuals in 1996-97 was attributable to those on more than Au$50,000 a year. Capital gains tax was paid by only 6% of those in the Au$20,700 to Au$38,000 income range.
Consequently, if Treasurer Peter Costello goes ahead with his plan to exempt the first Au$1,000 in capital gains from tax, the main beneficiaries will be those on the top income brackets. As the head of Costello's company tax committee, John Ralph, has warned, the exemption invites tax avoidance only by those able to split the gains among a string of beneficiaries.
Although high income earners may not thank Keating for introducing the capital gains tax, they have ample reason to be grateful to the former Labor leader for bringing in the dividends imputation system and cutting the top marginal rate for 60% to 47%.
When Howard was Treasurer before Labor won the 1983 election, higher income earners were taxed at the full 60% rate on dividends. There was no credit allowed for the amount of company tax already paid.
Keating changed this to give a credit for company tax. High income earners now pay only 11 cents on dividends once the 36 cents on the dollar company rate has been paid. This is one of the main reasons the net tax rate for people declaring an income of more than Au$2 million is below that applying to average weekly earners.
Most of the tables in the latest tax statistics still make this clear. However, one table glosses over this outcome by claiming the effective tax rate on multi-millionaires is much higher once all the tax credits and rebates are added back in. But the whole point of the credits and rebates is that they reduce the amount of tax owing. For the tables to be consistent, they should treat the company rate as being cut to zero if credits on dividends are no longer regarded as cutting the tax paid by high income earners.
Ironically, if Costello gets his way and manages to cut the company tax rate from 36 cents in the dollar to 30 cents, this will reduce the value of the credits on dividends. Those on the top marginal tax rate will then have to pay an extra 6 cents on their earnings from dividends.
For the 58% of companies which do not pay any tax, however, it won't make any difference if the rate is cut to zero.
And it's a fair bet that the individuals declaring more than Au$2 million a year will find a way around the extra 6 cents.