Australia's Future Tax System

Architecture of Australia's tax and transfer system

3.4 The distribution of taxes and transfers through time

The tax‑transfer system also distributes income over a person's life-cycle. That is, the tax‑transfer system can treat the same people differently at different times in their lives. At different stages of their lives individuals may be net taxpayers (pay more in tax than they receive in transfers) or net recipients of transfers (receive more in transfers than they pay in tax). This is illustrated in Chart 3.12 at an aggregate level for different household types. Net tax paid is defined as tax paid less cash transfers received.

Chart 3.12: Average weekly net tax for different household types in 2003‑04

Chart 3.12: Average weekly net tax for different household types in 2003‑04

  1. Reference person under aged under 35.
  2. Reference person aged 65 and over.

Source: ABS (2007b).

On average, younger households are net taxpayers. The average net tax paid by a single person aged under 35 in 2005‑06 was relatively low, reflecting generally lower private incomes for this group, higher levels of unemployment and higher numbers of individuals in receipt of student allowances. Young single people working full‑time would have a net tax burden above this average. Couples with children had a higher average tax burden than young single persons but a lower tax burden than young couples without children, in part because they receive family tax benefit and other child related transfers, such as higher rent assistance. Couples with older children, where the eldest child is aged 15 to 24, paid more tax than couples with younger children, primarily because they were likely to be more advanced in their careers and have higher net worth, and hence have higher average private incomes than young couples without children. Retired individuals and couples were net recipients of transfers, primarily reflecting the Age Pension and reduced private income.

Cameos can also show the impact of the tax‑transfer system over the life‑cycle

Chart 3.12 presented aggregate data on the effect of the tax‑transfer system on different household types. Another way to explore the effect of the tax‑transfer system on households as they age is to construct a set of hypothetical cameos of a household at different stages of its lifecycle. The following cameos describe the net tax position of the household in terms of the average net tax rate — defined as the net tax paid by the household as a proportion of household private income.

Box 3.7: A young single

Jason is a single person who has just completed education. Given his lack of work experience he has a lower income than established workers. Jason earnt $42,000 in 2008‑09, roughly 70 per cent of average ordinary time earnings. His average tax rate is 15.5 per cent. His disposable income (his income after tax and transfers) is $35,490. These figures take into account the small amount of low income tax offset (LITO) that Jason can claim and his liability to pay the 1.5 per cent Medicare levy. Jason deferred payment of his course fees and is therefore also required to repay his Higher Education Loan Program (HELP) debt at a rate of 4 per cent of his gross income. His overall net tax rate is 19.5 per cent. Through the superannuation guarantee scheme Jason is already building savings which will enhance his retirement income.

If Jason lost his job he might be eligible for Newstart Allowance and possibly other supplementary payments such as Rent Assistance. These payments are also available to families, although in this case the family's assets and income will be used to determine eligibility. Families with children also have interactions with family assistance, such as Family Tax Benefit. These benefits can significantly reduce average net tax rates.

If Jason lost his job he might be eligible for Newstart Allowance and possibly other supplementary payments such as Rent Assistance. These payments are also available to families, although in this case the family's assets and income will be used to determine eligibility. Families with children also have interactions with family assistance, such as Family Tax Benefit. These benefits can significantly reduce average net tax rates.

Box 3.8: Seven years later Jason has a young family

Jason is earning $60,000 a year. His partner, Melissa, stays at home to look after their two young children aged 2 and 4. Jason is eligible for Family Tax Benefit Part A and Melissa can claim Family Tax Benefit Part B. Together these payments add $9,469 to Jason and Melissa's income. After Jason pays income tax and Medicare levy, the family is left with a disposable income of $56,569, equivalent to a net tax rate of 5.7 per cent.

Melissa is on unpaid leave from her job as a social worker. If she had returned to her job for three days a week, she would have been earning $27,000 a year. With their children in long day care for three days a week at $5.60 per hour, Jason and Melissa would be eligible to claim $12,404 in Child Care Benefit and Child Care Tax Rebate. The family's private income would be $87,000 and their disposable income would be $70,568, giving them a net tax rate of 18.9 per cent.

These outcomes depend on the age of Jason and Melissa's children, because the amount of Family Tax Benefit they can receive depends on the age of the children. As a one‑earner couple with $60,000 in wage income, Jason and Melissa would have $58,012 in disposable income and face a net tax rate of 3.3 per cent if their children were aged 11 and 13.

Box 3.9: At 48 years of age Jason and Melissa are without dependent children

As an established couple without dependent children earning $80,000 and $45,000, Jason and Melissa face a net tax rate of 21.4 per cent. Their household disposable income is $98,225.

Older people can qualify for the age pension, as well as Pharmaceutical Allowance, the senior Australians tax offset (SATO), the mature aged worker tax offset (MAWTO) and different Medicare levy thresholds.

Box 3.10: Enjoying retirement

Jason and Melissa have vigorously pursued a healthy work‑life balance and are enjoying good health in their retirement. Aged 66 and 65 with private non‑working income of $12,000 and $6,000 respectively, Jason and Melissa are able to claim a part pension, entitling them to a concession card. They face a net tax rate of less than negative 100 per cent. That is, they receive a net transfer which more than doubles their disposable income.