How everyone is making money — and what it means for the tax they pay

Link copiedShareShare articleIn Australia, the way people earn their money affects the rate of tax they pay — and top earners have a very different income mix from everyone else. The federal government is expected to make changes to capital gains tax (CGT), negative gearing and the rules for family trusts in next week's budget. The precise detail of these changes remains to be seen. But one thing we already know is how everyone in Australia is making their money, and the ways that can affect the tax they pay. Let's see what that looks like across different income groups. We'll use them to break down the six ways people make their money, based on income level. Each dot equals 1 per cent of their total income. Let's start with those making between $0 and $60,000 per year. This breakdown is based on an Australia Institute analysis of Australian Taxation Office data. For the people in this group, their salaries or wages make up most of their income — 73 per cent. A further 7 per cent comes from government pensions and allowances. Just 3 per cent of their income comes from dividends, and it's the same story for partnerships and trusts. Finally, 1 per cent comes from capital gains — like those made when selling shares or properties that have increased in value. You'll also notice a group labelled 'other'. This category accounts for all the other ways people receive income, such as being gifted money, interest earned on term deposits or rental income from property investments. Now, let's move to the next group, where people earn between $60,000 and $150,000. Keep in mind: the typical Australian taxpayer sits towards the bottom of this group — earning $66,000 a year. So does the typical Australian full-time worker, who earns $100,000 a year. You've probably noticed a few dots moving around but the big picture hasn't changed that much. The vast majority of this group's income comes from wages — 87 per cent to be specific. They receive single-digit percentages from dividends and partnerships and trusts, and again, just 1 per cent from capital gains. Some in this group still receive government pensions and allowances, but the level is essentially negligible overall. The third income group is made up of those earning $150,000 to $250,000 — which is above what more than 80 per cent of full-time workers make. And this is where we start to see a bit more variation in the income streams. For this group, 76 per cent of their income comes from their salary or wage. But a further 9 per cent comes from partnerships and trusts — that's more than double the previous group. Four per cent comes from dividends and 2 per cent comes from capital gains. Let's move forward now and shift the dots to represent the second-highest earning group — the $250,000 to $1 million range. These people are in the top 5 per cent of earners. And for them, just 57 per cent of their income comes from their salary or wage. That's the lowest of all these groups so far. In its place, they're seeing more of their income arriving from partnerships and trusts (13 per cent), dividends (8 per cent) and capital gains (6 per cent). And now, let's look at the highest-earning group: people making more than $1 million — placing them easily within the top 1 per cent of Australian taxpayers. Among the nation's highest earners, only 18 per cent of their income comes from their salary or wage — that's the lowest out of every group. And we see a big step up in other types of earnings. Capital gains account for a much higher proportion of their income (26 per cent), as do partnerships and trusts (24 per cent) and dividends (18 per cent). Alright, we get it — that's a lot of numbers to take in. So let's have one last look at the difference. Here's how typical Australian workers — those earning $60,000 to $150,000 — make their money. And here's how people earning more than $1 million make theirs. Okay, you might be thinking, it's not very surprising that million-dollar earners make their money differently from your typical Aussie worker. But Greg Jericho, the Australia Institute economist who crunched these numbers, says what's important to understand is the way our top earners make their money means it's easier for them to minimise their tax. This is because the current 50 per cent CGT discount, as well as the complex tax arrangements available through trusts, make it possible to pay lower rates of tax than what many workers will pay on parts of their salaries. "You think, 'Hang on, they're operating on a different level than I am in terms of how tax is being treated,'" Mr Jericho says. "And yes, very wealthy people do pay a lot of tax but they also have a lot more ways of avoiding paying tax." Another way of digging into the data on the capital gains tax is to see who benefits most from the current 50 per cent tax concession. While this may be partly explained by a large capital gain pushing taxpayers up into the top bracket in

How everyone is making money — and what it means for the tax they pay

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How everyone is making money — and what it means for the tax they pay

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