This document discusses how Australians save and are taxed on different savings vehicles. It shows that the most common forms of savings are owner-occupied housing, superannuation, and investment properties. Housing is taxed favorably with no capital gains tax when sold. Superannuation contributions are taxed at 15% and withdrawals in retirement are generally tax-free. Negative gearing allows tax deductions for investment property expenses and only half of capital gains are taxed when assets are sold.
2. How do households save? What is the effective marginal tax
rate of different savings vehicles for
an average income earner?
How Australians save – and are
taxed by the Commonwealth
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-10
0
10
20
30
40
-10
0
10
20
30
40
Per centPer cent
Source: ABS cat. no. 5232.0, 6554.0 and Australian Treasury Source: Australian Treasury – see notes slide
Other 11.4%
Currency and deposits 9.1%
Shares 6.5%
Owner occupied housing 38.1%
Investment properties 13.3%
Superannuation 21.7%
3. The family home is taxed favourably
Home ownership has long been the Great Australian Dream. It
also provides shelter and a foundation for family and social
stability. Current treatment reflects this – no tax is paid on the
value people earn from living in the home, nor is any capital
gain from the property taxed when the property is sold.
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4. Superannuation and retirement income
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Three pillars support Australia’s retirement income system. Superannuation is
designed to play a major role in supplementing the Age Pension. Contributions to
super and super fund earnings are generally taxed at 15 per cent. And when money
is withdrawn from the super fund during retirement, this is generally tax-free.
AGE PENSION
A universal means-tested
publicly funded pension
SUPERANNUATION
GUARANTEE
Compulsory, fully funded
private savings
VOLUNTARY
SAVINGS
Voluntary private savings
• Safety-net level of
income including
longevity risk
protection
• Alleviates poverty
• A tax-assisted means
for additional self-
provision in retirement
through
superannuation
• Also includes savings
outside superannuation
AGE PENSION
A universal means-tested
publicly funded pension
SUPERANNUATION
GUARANTEE
Compulsory, fully funded
private savings
VOLUNTARY
SAVINGS
Voluntary private savings
• Safety-net level of
income including
longevity risk
protection
• Alleviates poverty
• Employers make
mandatory contributions
for eligible employees
• Ensures a minimum
level of employee
income is saved for
retirement (increasing
from 9.5% to 12%)
• A tax-assisted means
for additional self-
provision in retirement
through
superannuation
• Also includes savings
outside superannuation
5. Dividend imputation: removing
double taxation
Companies pay tax on their profits.
When Australian shareholders receive
dividends from Australian companies,
“dividend imputation” allows company
tax paid in Australia to be passed onto
shareholders as tax credits.
Those credits can offset the
shareholder’s personal tax liability.
Australian investors may favour
Australian shares, as the tax credit
means they have to pay less tax on the
dividends they receive.
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6. Negative gearing and investment
taxation
Negative gearing describes a situation when the expense of having that investment
(which includes interest payments on borrowings to invest) exceeds the income
from that investment (such as rent from an investment property or dividends from
shares).
Allowing tax deductions for costs associated with producing income is a
fundamental feature of Australia’s tax system. Allowing a tax deduction for interest
expenses is not a tax concession.
There is a tax concession, however, in the current tax system, as only half of capital
gains from selling assets such as investment properties and share investments are
taxed.
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7. Notes to slide 2
The graph shows the nominal effective marginal tax rates, which show the actual tax paid as a proportion of the
nominal pre-tax return, by savings vehicles for an average income earner with a marginal tax rate of 32.5 (plus a two
per cent Medicare levy).
It assumes:
• Six per cent nominal return (except shares, which assumes six per cent after company tax)
• Assets are all held for 25 years, and for rental property, 50 per cent of the return is attributable to capital gain and
50 per cent to rental income and superannuation contributions do not exceed the prescribed contribution caps
• No assets have been negatively geared. The own home has a nominal effective marginal tax rate of zero, as it is
purchased out of after-tax income, but subsequent returns on it are not taxed
• Bank accounts, property and shares also use after-tax income but their returns are taxed depending on the
vehicle
• The nominal effective marginal tax rate for superannuation is negative because contributions to superannuation
are made from pre-tax and are only taxed at 15 per cent. For example, $100 of pre-tax labour income would result
in a super contribution of $85 (after 15 per cent tax) but an individual would only receive $65.50 if they put it into
other saving vehicles because of the application of their marginal tax rate (34.5 per cent in this case).
• Individuals receive tax credits on domestic shares for the company tax paid in Australia which offset the
shareholder’s personnel tax liability.
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