Interesting article on marginal and average tax rate

[Ext User(John Wright)]

The recent article on the budget changes at
http://www.theaustralian.news.com.au/story/0,20867,21713469-5001942,00.html
says

"The Government has decided to provide relief from individual taxation in
two stages. The first stage involves an increase in the low-income rebate
and an increase in the 15 per cent tax upper threshold to $30,000. ... To
assess the impact of these changes it is necessary to look at average tax
rates - that is, how much tax is paid on each dollar of income earned. This
is very different to only looking at marginal tax rates, or how much tax is
paid on the next additional dollar of income. The average rate gives a more
complete picture of how much tax a person really pays. These latest
reductions mean that a person will pay an average of 15 per cent on their
taxable income when their income reaches $39,000. ... I have targeted 15 per
cent tax because this is the tax rate that applies to superannuation
savings. In effect, everyone with a taxable income of less than $39,000 per
year will be paying less tax than their superannuation fund. This comparison
is extremely important for any salary earner thinking of salary sacrificing
contributions into super. Under tax law, salary sacrifice contributions are
employer contributions and hence are taxed in the super fund at 15 per cent.
If you use salary sacrifice to drive your take-home pay below $39,000, you
may be ensuring that you pay more tax because your fund will pay 15 per
cent, when your own personal tax rate might be lower."

Is that really so? Over $30,000, every 1 marginal dollar income will cost
31.5 cents in tax if taken as salary, but only 15 cents if sacrificed into
super. I can't figure out why the author says it is not marginal tax but
average tax that matters. That last sentence in the quote seems totally
wrong.

Can someone see sense in what the article says?

Regards - JW

[Ext User(Travis Morien)]

On May 21, 9:42 am, "John Wright" <someemai...@somedomain.com> wrote:
> The recent article on the budget changes athttp://www.theaustralian.news.com.au/story/0,20867,21713469-5001942,0...
> says
>
> "The Government has decided to provide relief from individual taxation in
> two stages. The first stage involves an increase in the low-income rebate
> and an increase in the 15 per cent tax upper threshold to $30,000. ... To
> assess the impact of these changes it is necessary to look at average tax
> rates - that is, how much tax is paid on each dollar of income earned. This
> is very different to only looking at marginal tax rates, or how much tax is
> paid on the next additional dollar of income. The average rate gives a more
> complete picture of how much tax a person really pays. These latest
> reductions mean that a person will pay an average of 15 per cent on their
> taxable income when their income reaches $39,000. ... I have targeted 15 per
> cent tax because this is the tax rate that applies to superannuation
> savings. In effect, everyone with a taxable income of less than $39,000 per
> year will be paying less tax than their superannuation fund. This comparison
> is extremely important for any salary earner thinking of salary sacrificing
> contributions into super. Under tax law, salary sacrifice contributions are
> employer contributions and hence are taxed in the super fund at 15 per cent.
> If you use salary sacrifice to drive your take-home pay below $39,000, you
> may be ensuring that you pay more tax because your fund will pay 15 per
> cent, when your own personal tax rate might be lower."
>
> Is that really so? Over $30,000, every 1 marginal dollar income will cost
> 31.5 cents in tax if taken as salary, but only 15 cents if sacrificed into
> super. I can't figure out why the author says it is not marginal tax but
> average tax that matters. That last sentence in the quote seems totally
> wrong.
>
> Can someone see sense in what the article says?
>
> Regards - JW

As loath as I am to pick holes in an article by Tony Negline, who I
know personally as one of the smarter technical people in the FP area,
the premise of this article doesn't make a lot of sense to me.

Average tax rates are all very well, but tax planning is something you
always do with your last marginal dollar at your highest marginal tax
rate. Salary packaging into super any money you earn over the 15% tax
threshold makes sense, and in doing so you'll reduce your average tax
rate even further.

Travis
www.travismorien.com

[Ext User(Therippleffect)]

Don't forget about the tax free threshold.

"John Wright" <someemailid@somedomain.com> wrote in message
news:4650f8f3$0$14719$afc38c87@news.optusnet.com.a u...
> The recent article on the budget changes at
> http://www.theaustralian.news.com.au/story/0,20867,21713469-5001942,00.html
> says
>
> "The Government has decided to provide relief from individual taxation in
> two stages. The first stage involves an increase in the low-income rebate
> and an increase in the 15 per cent tax upper threshold to $30,000. ... To
> assess the impact of these changes it is necessary to look at average tax
> rates - that is, how much tax is paid on each dollar of income earned.
> This is very different to only looking at marginal tax rates, or how much
> tax is paid on the next additional dollar of income. The average rate
> gives a more complete picture of how much tax a person really pays. These
> latest reductions mean that a person will pay an average of 15 per cent on
> their taxable income when their income reaches $39,000. ... I have
> targeted 15 per cent tax because this is the tax rate that applies to
> superannuation savings. In effect, everyone with a taxable income of less
> than $39,000 per year will be paying less tax than their superannuation
> fund. This comparison is extremely important for any salary earner
> thinking of salary sacrificing contributions into super. Under tax law,
> salary sacrifice contributions are employer contributions and hence are
> taxed in the super fund at 15 per cent. If you use salary sacrifice to
> drive your take-home pay below $39,000, you may be ensuring that you pay
> more tax because your fund will pay 15 per cent, when your own personal
> tax rate might be lower."
>
> Is that really so? Over $30,000, every 1 marginal dollar income will cost
> 31.5 cents in tax if taken as salary, but only 15 cents if sacrificed into
> super. I can't figure out why the author says it is not marginal tax but
> average tax that matters. That last sentence in the quote seems totally
> wrong.
>
> Can someone see sense in what the article says?
>
> Regards - JW
>
>
>
>
>

[Ext User(Bill Hobba)]

"John Wright" <someemailid@somedomain.com> wrote in message
news:4650f8f3$0$14719$afc38c87@news.optusnet.com.a u...
> The recent article on the budget changes at
> http://www.theaustralian.news.com.au/story/0,20867,21713469-5001942,00.html
> says
>
> "The Government has decided to provide relief from individual taxation in
> two stages. The first stage involves an increase in the low-income rebate
> and an increase in the 15 per cent tax upper threshold to $30,000. ... To
> assess the impact of these changes it is necessary to look at average tax
> rates - that is, how much tax is paid on each dollar of income earned.
> This is very different to only looking at marginal tax rates, or how much
> tax is paid on the next additional dollar of income. The average rate
> gives a more complete picture of how much tax a person really pays. These
> latest reductions mean that a person will pay an average of 15 per cent on
> their taxable income when their income reaches $39,000. ... I have
> targeted 15 per cent tax because this is the tax rate that applies to
> superannuation savings. In effect, everyone with a taxable income of less
> than $39,000 per year will be paying less tax than their superannuation
> fund. This comparison is extremely important for any salary earner
> thinking of salary sacrificing contributions into super. Under tax law,
> salary sacrifice contributions are employer contributions and hence are
> taxed in the super fund at 15 per cent. If you use salary sacrifice to
> drive your take-home pay below $39,000, you may be ensuring that you pay
> more tax because your fund will pay 15 per cent, when your own personal
> tax rate might be lower."
>
> Is that really so? Over $30,000, every 1 marginal dollar income will cost
> 31.5 cents in tax if taken as salary, but only 15 cents if sacrificed into
> super. I can't figure out why the author says it is not marginal tax but
> average tax that matters. That last sentence in the quote seems totally
> wrong.
>
> Can someone see sense in what the article says?

Well their is the tax free threshold. From my perspective, as a guy that
has had to retire early due to illness, and is surviving on a disability
pension, and perhaps what I can make trading shares/CFD's, and eagerly
awaiting his government employees pension at 55, this is great news. One
thing that has always made me sick is the fact that the indexed pension you
get from the CSS scheme is not tax advantaged in any way - you pay full tax
on it. For low income earners like I will be then, its good to see I will
be getting some tax relief.

Thanks
Bill

>
> Regards - JW
>
>
>
>
>

[Ext User(Moonshadow)]

John Wright wrote:

> The recent article on the budget changes at
> http://www.theaustralian.news.com.au/story/0,20867,21713469-5001942,00.html
> says
>
> "The Government has decided to provide relief from individual taxation in
> two stages. The first stage involves an increase in the low-income rebate
> and an increase in the 15 per cent tax upper threshold to $30,000. ... To
> assess the impact of these changes it is necessary to look at average tax
> rates - that is, how much tax is paid on each dollar of income earned. This
> is very different to only looking at marginal tax rates, or how much tax is
> paid on the next additional dollar of income. The average rate gives a more
> complete picture of how much tax a person really pays. These latest
> reductions mean that a person will pay an average of 15 per cent on their
> taxable income when their income reaches $39,000. ... I have targeted 15 per
> cent tax because this is the tax rate that applies to superannuation
> savings. In effect, everyone with a taxable income of less than $39,000 per
> year will be paying less tax than their superannuation fund. This comparison
> is extremely important for any salary earner thinking of salary sacrificing
> contributions into super. Under tax law, salary sacrifice contributions are
> employer contributions and hence are taxed in the super fund at 15 per cent.
> If you use salary sacrifice to drive your take-home pay below $39,000, you
> may be ensuring that you pay more tax because your fund will pay 15 per
> cent, when your own personal tax rate might be lower."
>
> Is that really so? Over $30,000, every 1 marginal dollar income will cost
> 31.5 cents in tax if taken as salary, but only 15 cents if sacrificed into
> super. I can't figure out why the author says it is not marginal tax but
> average tax that matters. That last sentence in the quote seems totally
> wrong.
>
> Can someone see sense in what the article says?
>
> Regards - JW
>

I think Tony Negline is confused.

While he's used the conditional "may" and "might" in his last sentence,
it seems to me that this sentence is at best misleading, and at worst
simply wrong for the situations I can imagine.

Given a choice of paying either 15% tax or 31.5% tax on $9K, I'd prefer 15%.