In 2011–12 some people with incomes of over $1 million had taxable incomes less than $6,000, meaning they paid no tax. How did they reduce their incomes so much for tax purposes, and how are their affairs different from others with equally high incomes, but who paid tax on most of their earnings? And does this raise issues relevant to the Government’s aim to create ‘a better tax system that delivers taxes that are lower, simpler, fairer’?
The Australian Taxation Office (ATO) publishes aggregated data collected from tax returns which provides considerable detail about the tax affairs of Australians. The latest available data relates to the 2011–12 income tax year, and Table 9 provides information grouped by both total income (as reported in the tax return) and taxable income. This data only allows for analysis of averages, but still provides some interesting comparisons between the affairs of different income groups, although caution must be used where there are very low numbers of tax payers recorded. It should also be noted that these are the figures provided in the tax returns, and may have been amended following ATO processing.
This data shows that the average total income of the around 75 (the data is rounded to the nearest five) millionaires who paid no tax was $2.6 million. For the 8,425 who paid high levels of tax, their average income was $2.2 million, on which they paid an average of over $930,000 in tax. So why do these groups pay such a different amount of tax?
About two-thirds of both groups claimed a deduction relating to the cost of managing their tax affairs. For the no tax group, the average claim was $1.4 million, compared to an average of $10,000 for the high tax group. These claims include the fees paid to tax advisers, the cost of travelling to receive that advice, and the cost of appeals in relations to tax affairs. Possibly the average claim by the no tax group reflects the high cost of some legal proceedings.
The pattern in relation to the write down associated with a loss in earlier years was somewhat different. Such losses can be offset against the current year’s income and hence average income over several years for those with volatile income sources. Less than one per cent of the high tax group claimed an earlier year tax loss, and the average claim was about $280,000. In contrast, two-thirds of the no tax group claimed this loss, with an average of $2.1 million.
The no tax group had low earnings from wages and salaries. Only about 20% reported earnings from wages or salaries, and on average they reported incomes from these sources of some $45,000. This contrasts with the high tax payers, where nearly two-thirds reported income from salary and wages at an average of nearly $680,000.
Work related deductions for the no tax payers were generally very low, except in the category of ‘other deductions’, where the average claim was over $120,000, compared to an average of less than $4,000 for the high tax payers. ‘Other deductions’ includes things such as home office expenses, professional seminars and conferences, and the cost of tools and professional libraries.
The no tax paying group on average earned more in interest than those in the high tax paying group—over $140,000 as against less than $45,000—but also claimed much higher deductions for costs associated with earning this income, such as account keeping fees and the costs of borrowing for income-producing investments, with deductions being over 60% of earnings for this group compared to less than 20% for the high tax group. Both groups earned a similar amount from dividends, but again the no tax group claimed a higher proportion in deductions related to dividend income (including the cost of obtaining investment advice and the interest on borrowings to purchase shares) at a third of the earnings, compared to around 2% claimed in deductions by their high tax counterparts.
A significant proportion of tax payers in both groups reported income from partnership and trust distributions, with both groups reporting losses from primary production distributions (an average of over $2 million for the no tax group and some $280,000 for the high tax group). Of those who reported income or loss from business, the no tax group reported an average loss of around $100,000 while the high income group reported an average profit of over $750,000.
Overall, it appears that those who had high incomes in 2011–12 but paid no tax had a high proportion of their income from volatile sources such as primary production and other business activities. However it would also seem that managing the tax affairs for those with such complex arrangements is a major cost to the tax system. A simpler tax system could reduce this cost and deliver a fairer outcome for tax payers.