Marginal Rates of Tax

The marginal rate of tax or MRT

 

is the percentage of tax

 

levied on the last dollar earned.

 

It doesn’t mean that you pay that percentage overall, just on the number of dollars that are in your highest tax bracket.

Tax rates 2019-2020 (excluding the Medicare Levy of 2%)

Taxable incomeTax on this income
0 – $18,200Nil
$18,201 – $37,00019c for each $1 over $18,200
$37,001 – $90,00032.5c for each $1 over $37,000
$90,001 – $180,00037c for each $1 over $90,000
$180,001 and over45c for each $1 over $180,000

https://www.ato.gov.au/rates/individual-income-tax-rates

 

Someone on $92,000 in the 37%  marginal rate would probably pay approximately 25% of their income in tax because some of their income incurs ZERO tax and some 19% and some 32.5%.

In this example, assuming no deductions, the tax-payer is liable for approximately 23% of their income in tax even though they fall into the 37% tax bracket.

The Medicare Levy is applied to your taxable income. If taxable income is $92,000, then 2% or $1840 would be added to this taxpayer’s liability. $21537 + $1840 = $23,377

which = 25.4% of their total income. ($23,377 / $92,000)

 

If you can reduce your taxable income with legitimate costs incurred in earning an income (including property-related), the tax payable will be calculated on the lower level of income and not your total earnings.

Using the example in the negative gearing topic, assume this taxpayer has an investment property earning $25,000 per annum in rent and costs of $33,500 plus depreciation benefits of $10K (it’s a brand new property). This means the new gross income becomes $117,000 ($92,000 + $25,000). The allowable deductions are $43,500 ($33,500 + $10,000). The new taxable income becomes $73,5000 ($117,000-$43,500). Tax payable will be calcuated on $73,500:

Now the proportion in tax payable has dropped to 13% ($15,434 / $117,000). The Medicare Levy is now applied at 2% to $73,500 = $1470.

Total tax liability now equals $15,434 + $1,470 = $16,904 or 14.4%

This taxpayer’s liability has been reduced by $6,473  (or $124.48 per week)

 

Australia has a progressive system of income tax. The more you earn, the bigger proportion of your income is paid in tax.

The GST, for example; is a flat rate of tax for all, and therefore more of a burden on low-income earners than it is for higher-income earners.

It is a regressive tax.

Tax brackets are adjusted to achieve a more equitable tax system.

‘Bracket creep’ occurs when incomes rise as a result of inflation, and tax-payers are forced into higher marginal tax brackets. They can’t buy more with the ‘extra’ income because it is a result of inflation (a general increase in prices) and so they are negatively impacted.

Tax liability is assessed on ‘taxable income’ = gross income minus any allowable deductions.

Rental income from an investment property is considered income and as such is added to your gross income.

BUT all the costs of ownership can be deducted from your gross income as can depreciation.

The rate at which you can claim tax credits from the ATO is at your highest marginal rate of tax. The marginal rate of tax is levied on your taxable income.

Tax minimization through negatively geared property investment is legal, and an Australian Tax Office supported tax strategy.

It is a requirement to keep accurate records of all expenses.

A Quantity Surveyor’s Report (QSR) professionally prepared for every investment property is essential to ensure that the maximum depreciation benefits are claimed.