Tax Scales: Why are they relevant?

We all know and agree that tax is important.  It pays for our politicians, so is generally money well spent.

However, while our politicians spend it, most of us pay it! The scale shown below represents how much tax an individual will pay at differing levels of income.

Resident tax rates 2021–22

Taxable income

Tax on this income

0 – $18,200

Nil

$18,201 – $45,000

19 cents for each $1 over $18,200

$45,001 – $120,000

$5,092 plus 32.5 cents for each $1 over $45,000

$120,001 – $180,000

$29,467 plus 37 cents for each $1 over $120,000

$180,001 and over

$51,667 plus 45 cents for each $1 over $180,000

* The above rates do not include the Medicare levy of 2%.

A misconception among may taxpayers relates to the “marginal” tax rate.  Many believe that an increase in income which takes them into the next bracket, results in all income being taxed at the higher rate.  It is only the income above that limit which suffers the higher rate.

It is this marginal tax rate that is important in our work.

If you receive $10,000 in interest, the after-tax amount you can spend will differ widely, depending on your income and/or investment structure.

  1. Taxpayers earning $250,000 per year would lose 47% in tax and Medicare on the interest. Therefore, you can spend the remaining 53% ie $5,300.
  2. Taxpayers earning $90,000 per year lose 34.5% in tax and Medicare. Therefore, they can spend $6,550.
  3. Taxpayer has a superfund that earns $10,000 interest. The fund value (which can be spent at a later date) rises by $8,500.
  4. Taxpayer has a pension fund earning $10,000 interest. Can spend $10,000 !!

You can see from these simple examples that tax does matter when considering investment strategies.  It is definitely not the only consideration, but the difference between spending $5,300 or $10,000 is a lot of nights out!!