Australia's Future Tax System

Architecture of Australia's tax and transfer system

5.6 Comparisons of the top personal tax rate on capital income

Chart 5.9 shows the top personal tax rate for the OECD‑10 countries for three major classes of capital income, with Panel D showing tax on dividends at the marginal tax rate for the average worker.

Among the OECD‑10 countries, Australia has one of the higher top personal tax rates on capital gains, notwithstanding the 50 per cent discount available for gains on assets held for at least 12 months. There is significant divergence between countries in the treatment of capital gains (Panel A). New Zealand does not impose capital gains tax (CGT) and of those that have a CGT regime, some have a flat rate, two have a stepped rate (as the holding period increases the tax rate decreases), and others (such as Australia and Canada) use a discount system for taxing capital gains (that is, only a proportion of the gain is taxable). For shares, Switzerland does not tax capital gains and the Netherlands only does so for gains on substantial holdings (greater than 5 per cent ownership).

Chart 5.9: Comparative tax rates on capital income, OECD‑10 (2007)

A: Capital gains on shares

Chart 5.9: Comparative tax rates on capital income, OECD­10 (2007) - Column Chart A: Capital gains on shares

B: Interest from ordinary bank accounts

Chart 5.9: Comparative tax rates on capital income, OECD­10 (2007) - Column Chart B: Interest from ordinary bank accounts

C: Dividends, top marginal tax rate taxpayer

Chart 5.9: Comparative tax rates on capital income, OECD­10 (2007) - Column Chart C: Dividends, average wage taxpayer

D: Dividends, average wage taxpayer

Chart 5.9: Comparative tax rates on capital income, OECD­10 (2007) - Column Chart D: Dividends, average wage taxpayer

Source: OECD Tax Database, unpublished OECD estimates, International Bureau of Fiscal Documentation, national tax administrations, Australian Treasury estimates.

Panels C and D illustrate tax rates on distributions of domestic source income to a resident individual shareholder, including corporate income tax, personal income tax and any type of integration or relief to reduce the effects of double taxation. The charts show that Australia's top overall tax rate on dividends sourced from domestic profits is in the middle of the range of other OECD‑10 countries for high income earners, and relatively low for average income earners.

For Australia and New Zealand, the charts highlight the use of a full imputation system (where the credit depends on company tax paid). For the majority of the remaining countries, the top overall tax rate on dividends is greater than the top marginal personal tax rate, which primarily reflects their integration systems only providing partial relief of the double taxation of dividend income. The imputation system also has different equity implications as indicated by the change in Australia's ranking from fifth lowest for high income earners to second lowest for average income earners.