A large number of Australians will baulk at the 49 per cent tax rate being imposed on incomes over $180,000. As a result I do not believe the deficit levy will raise anything like the $3 billion Treasury estimates over the next three years. And that means the government may actually honour its promise and stop the levy after three years.
In the UK they tried lifting the top tax rate and soon found it did not work. In Australia during the 1970s and 1980s, when there were top tax rates at or above the 50 per cent level, dodgy tax schemes boomed.
But currently in Australia there are a series of legal strategies that middle to high-income earners can adopt to keep themselves out of the 49 cents in the dollar tax bracket. Here is my list but there will be many more:
- Negative gearing on property investment. Investor purchasing of housing has increased dramatically in the last 12 months and will rise even further as people use the excess cost of interest expense over rental income to reduce their tax and avoid paying 49 per cent tax rates. The government appears to understand this and is forecasting that the rate of growth in private dwelling investment will more than double from 3.5 per cent in 2013-14 to 7.5 per cent in 2014-15.
- People aged 49 on June 30, 2014 (not this year) can invest $35,000 in superannuation and will do so. That means you earn up to $215,000 and avoid the 49 per cent tax blow.
- There are a series of expense areas that require close analysis but can reduce taxable income.
- A 49 per cent tax rate will incentivise couples to look more closely at their lifestyles. Rather than have one person work 70 hours a week it makes a lot more sense to reduce those hours and keep your taxable income below $180,000 (or $215,000 with superannuation). The balance is made up by the spouse’s extra income. It is far more tax efficient for the major income earner to mind the children to allow the spouse to work.
- And of course if your business is able to use independent contracts then the spouse can provide services to divert some of that income to a second taxpayer. Care must be taken here and the arrangement must be able to stand investigation by the tax office.
- Charities have had a hard time in recent years but tax deductions are now worth more. Of course when the money is donated it’s all gone.
Footnote: The official top tax rate is 45 per cent but to that you add a 1.5 per cent Medicare levy, a 0.5 per cent disability levy and a 2 per cent deficit levy -- total tax rate 49 per cent.