Australia's Future Tax System

Architecture of Australia's tax and transfer system

7.1 The role of Australia's personal tax‑transfer system

The primary roles of the tax‑transfer system are revenue collection and income redistribution. Income is redistributed to Australians through the combination of a progressive tax system and targeted transfers. The personal tax system raised around 45 per cent of total Australian Government revenue in 2006‑07. Under Australia's progressive tax system, those with a higher capacity to pay bear a greater than proportional share of the tax burden. Tax offsets and exemptions are also used to target assistance to individuals and families with lower means or to assist individuals in particular circumstances.

On average, taxpayers with taxable incomes of $10,000 or less in 2005‑06 paid 4.4 per cent of their income in income tax (Chart 7.1). Those with taxable incomes over $250,000 paid 42.4 per cent of their income in tax on average.

Chart 7.1: Average tax rates by income range in 2005‑06(a)

Chart 7.1: Average tax rates by income range in 2005-06(a)

  1. Excludes taxpayers with nil taxable income.

Source: Australian Government administrative data.

Spending on the transfer system by the Australian Government amounted to over 25 per cent of revenue collected in 2006‑07. Transfers provide financial assistance to individuals who are unable, or not expected, to fully support themselves, and to families to help meet the costs of raising children.

The net effect of the personal tax‑transfer system is to reduce the incomes of higher income households, and increase the incomes of lower income households (see Chart 7.2). The combined effect of taxes and transfers is to make the distribution of income across households more equal. The ABS reports that there was no significant change in income inequality from the mid‑1990s to 2005‑06 (ABS 2007d). This is despite a more pronounced increase in private incomes at higher income levels than the increases for those on low and middle incomes.

Chart 7.2: Average weekly private and disposable incomes in 2003‑04(a)

Chart 7.2: Average weekly private and disposable incomes in 2003-04(a)

  1. Household equivalised incomes. Equivalised incomes take account of different household sizes and structures by identifying the amount needed to provide an equivalent standard of living to that of a single person.

Source: ABS (2007b).