New tax system throws up a familiar foe ... bracket creep

MANY taxpayers will not be getting the full benefit of lower tax rates due to bracket creep.

Bracket creep occurs when a person’s taxable income rises enough to take them into the next, higher, tax bracket.

That portion of their income in the higher tax bracket is taxed at the higher rate.

Goldfinch Accountants partner Helen Warnock said that, because average earnings were going up, people were being moved into higher tax brackets.

“Once your income goes over $60,000 you are losing half of your money in tax,” she said.

“Bracket creep is alive and well even though tax rates have been reduced.”

Ms Warnock is one of the many tax experts who believe indexing tax brackets to inflation is the answer.

However, many of these experts also think this will prove unpopular with the Federal Government because bracket creep nets it a lot of money.

The Fraser Government tied the brackets to inflation in 1977 - for one year.

Another tax debate is raging around whether the highest marginal tax rate should be brought closer to the corporate tax rate.

The gap between the highest marginal rate and the corporate rate will have widened by 6 per cent come July.

From July 1 the corporate tax rate will be 30 per cent – while the highest marginal rate is 47 per cent, before the Midicare levy .

Taxation Institute of Australia tax director Michael Dirkis said bringing the marginal rate closer to the corporate rate would make tax minimisation options less attractive.

“A lot of our anti-avoidance laws are aimed at stopping people from dodging the higher brackets. Bringing the highest marginal rate down to company rates removes most tax avoidance issues,” Mr Dirkis said.

“But this is a difficult and vexed question because some of the high-wealth individuals are likely to get off.”

Horwarth-Perth tax consulting partner Russell Garvey said reducing the marginal tax rate would make tax planning easier.

“The gap between the corporate rate and the marginal rate raises the question of how people structure their affairs,” he said.

And further developments have arisen for those who tried to structure their taxation affairs through tax-effective investments.

An interim report by the Senate Economics References Committee blasted the tax office for its tardiness in dealing with mass marketed tax-effective schemes.

The committee also recommended an amnesty for those investors who had done due diligence and still become caught by the schemes and suggested suspending the accrual of interest on the tax debts of participants selected as test cases.

Committee member Senator Andrew Murray an interim report was unusual, but said the issue had become very emotive.

“We are talking about 300 schemes and 65,000 investors involved in this,” Senator Murray said.

“A lot of these investors did due diligence and still got caught short.”

And the winners are ...

WITH the new “lower” tax rates taking effect from this financial year, those earning $60,000 a year appear to be the biggest winners, according to figures produced for Business News by Goldfinch Accountants.

If you are on $60,000 a year, your tax-free day has come forward by 20 days, from October 28 to October 8.

Tax-free day is based on the assumption that a person puts all of their money towards their tax bill from the beginning of the financial year.

A person on $60,000 is also saving $3,222 on their tax bill. Under the new 42 per cent marginal tax rate they will pay $16,480 in tax. Last financial year they faced a marginal rate of 47 per cent and paid $19,702.

For those on $200,000, their tax free day arrives six days earlier than it did under the old tax rates – on December 1 rather than December 7.

Under the pre-July 2000 tax rates, a person earning $200,000 would pay $87,602 in tax – on the highest marginal tax rate of 47 per cent plus the 1.5 per cent Medicare levy – and take 160 days to clear the tax debt.

On the new tax rates effective for the 2000-01 tax year, the tax bill falls to $84,380 and it will take 154 days to clear the debt.

Tax-free day on a $100,000 pay packet has come forward 12 days, from November 20 to November 11.

While the new tax rates have brought tax-free days forward, they have done little to remove the problem of bracket creep.

Many tax experts suggest tying the five tax brackets to inflation is the answer.

And meanwhile, the debate rages over whether the highest marginal tax rate should be brought nearer to the company tax rate.

It is thought this would remove a number of tax minimisation efforts in one hit.

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