How savings are taxed

A sketch in five slides

May 2015

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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

Curra

ncy

and

depo

sits

Owne

r occ

upied

Hou

sing

Prope

rty

Super

annu

ation

Domes

tic s

hare

s

Foreig

n sh

ares

-10

0

10

20

30

40

-10

0

10

20

30

40Per cent Per 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%

Curre

ncy

Inve

stm

ent p

rope

rties

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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Superannuation and retirement incomeThree 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is withdrawn from the super fund during retirement, this is generally tax-free.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 PENSIONA universal means-testedpublicly funded pension

SUPERANNUATIONGUARANTEE

Compulsory, fully fundedprivate 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 PENSIONA universal means-testedpublicly funded pension

SUPERANNUATIONGUARANTEE

Compulsory, fully fundedprivate 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

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Dividend imputation: removing double taxationCompanies 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.

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. 6

Notes to slide 2The 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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