The government has said it is looking for ways to combat bracket creep – like making smaller brackets or adjusting them for inflation – but in the meantime, here’s how it affects the average working taxpayer.
Jackie earned $179,000 a year (excluding super) during 2014-15. She sat in the $80,001 to $180,000 tax bracket, so her income in that bracket was taxed at 37%*. Her employer offered her a raise of $11,000 a year. Jackie was thrilled to earn $190,000, but she unknowingly crept into the next tax bracket.
The tax rate for her new bracket (more than $180,000) is 47%*. As she enters the higher bracket, her additional tax payable, because of the $11,000 pay rise, is $5,070 a year. Were Jackie left within her previous bracket, her pay rise would have attracted $4,070 in extra tax — in other words, she is now liable to an additional $1,000 in tax. But there are options for her to lessen this burden.
Option 1. Salary sacrifice the additional income
Instead of accepting the higher salary as purely taxable income, Jackie decides to sacrifice an extra $10,000 into her super. That way, her taxable income is reduced to keep her in the lower tax bracket, and that $10,000 yearly super injection ends up being taxed at only 15% (although she will need to consider contribution caps).
Super isn’t the only avenue. Consider speaking to your employer about a novated leasing arrangement. Salary packaging a car is a good way to potentially reduce your taxable income if you need a nice new set of wheels.
Option 2. Negatively gear properties and/or shares
Many shrewd taxpayers out there are quick to tout the benefits of negative gearing. While you shouldn’t misconstrue the day-to-day arrangements as anything but an economic loss, offsetting that loss against your taxable income is a good way to reduce your taxable income and stay in a lower tax bracket.
Option 3. Push back your deductions
If you’re on the verge of creeping into the next tax bracket and you think it’ll happen in the next financial year, consider paying any deductible expenses after June 30. That means membership fees, course fees, technical resource expenses and so forth may prove more advantageous if deducted later rather than sooner.
*Excluding the Medicare levy but including Temporary Budget Repair Levy (if applicable).