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 applicable in 2020-2021 (excluding the Medicare Levy of 2%) are:

 

Someone on $125,000 is in the 37% marginal rate but they 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% and some 37%

 

In this example, assuming no deductions, the tax-payer is liable for approximately 25% of their income in tax even though they fall into the 37% tax bracket –  $31,317 / $125,000 = 25%

The Medicare Levy is then applied to your taxable income. If taxable income is $125,000, then 2% or $2500 would be added to this taxpayer’s liability. $31,317 + $2500 = $33,817 which = 27% of their total income. ($33,817/ $125,000)

 

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. You will have the opportunity to reduce your tax payable on income and the Medicare Levy payable as well.

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 $150,000 ($125,000 + $25,000). The allowable deductions are $43,500 ($33,500 + $10,000). The new taxable income becomes $106,500 ($150,000-$43,500). Tax payable will now be calcuated on $106,500, not on $125,000.

 

Total tax liability now equals $25,079 + $2130 = $27,209 or 18%

This taxpayer’s liability has been reduced by $6,608  (or $127 per week)

 

Australia has a progressive system of income tax. The more you earn, the larger 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.

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.

 

Stamp Duty

Stamp duties are levied by

Australian State Governments

on the transfer of property

 

Stamp Duty is a tax levied on legal documents.

Australian State Governments levy stamp duties on the transfer of property from one owner to another. It is payable on land and also on the purchase price of an existing property.

It is levied at different rates by each of the states, and each offers various concessions and incentives.

Stamp Duty is both a taxation revenue measure by government and a means of influencing patterns of demand and expenditure.

It is deemed an acquisitions cost or ‘capital cost’ by the ATO when purchasing a property. It is not tax-deductible immediately or in stages over the first few years of ownership of the property as loan costs are, but can be offset against any capital gains tax payable when the property is eventually sold.

Stamp duty is payable on the full purchase price for a house, townhouse, apartment or any single contract purchase.

Stamp duty is payable only on the land content of a house and land package, which is a 2 part, ‘split’ contract.

There are a large number of online stamp duty calculators available.

NSW
https://www.apps08.osr.nsw.gov.au/erevenue/calculators/landsalesimple.php
VIC
www.sro.vic.gov.au/calculators/land-transfer-calculator
QLD
https://www.qld.gov.au/housing/buying-owning-home/advice-buying-home/transfer-duty/how-much-you-will-pay/calculating-transfer-duty/estimate-transfer-duty
SA
https://www.revenuesa.sa.gov.au/taxes-and-duties/stamp-duties/calculators
WA
https://stampduty.calculatorsaustralia.com.au/stamp-duty-wa
TAS
https://www.sro.tas.gov.au/property-transfer-duties/property-transfer-duty-calculator
NT
https://nt.gov.au/property/buying-and-selling-a-home/settle-the-sale/stamp-duty-buying-or-selling-a-home/conveyance-calculator

Stamp duty on property purchases is a significant tax revenue-raising exercise for state and territory governments.

As the rate of stamp duty increases as the price of the properties increase, it is a progressive tax. If you can afford to purchase a $1million property, it is considered equitable that you pay more stamp duty than someone who can only afford to buy a $350,000 property.

In times of a buoyant property market, state governments fill the coffers with large amounts of revenue. The NSW State Government netted $13.8 billion in 2017-18, due to the lively property market and stamp duty was the government’s single most lucrative source of revenue.

Stamp Duty is ordinarily due and payable at settlement. It is a cost that you cannot avoid and must be budgeted for in the purchase costs.