An election budget looms Tuesday, surely chock with goodies.  Is your marginal rate what you really think it is? There are really eleven tax brackets, not four. Michael West reports.

This is how marginal tax rates are conventionally set out:

< $18,200nil
$18,201 to $37,00019.00%
$37,001 to $90,00032.50%
$90,001 to $180,00037.00%
> $180,00045.00%

(That’s plus 2 per cent Medicare. Your marginal rate (right hand column) is the tax take on your next dollar).

This is not even half the story. A few Treasury boffins know the story, the Tax Office too, but they are loathe to let the cat out of the bag. If you look at how these marginal rates interact with other tweaks to the personal tax system, you will find there are eleven tax brackets, not four.

It is these tweaks that count. There are two offsets and the Medicare “fade-in”, which applies to nearly all Australian residents.

There is also a small business offset, sometimes called the small business 8 per cent discount. This is worth watching as it commands the largest dollar benefit but we can put it aside for the moment as it focusses on sole traders. We will also ignore family tax benefits, as not everybody qualifies.


The offsets which tweak the system are cutely named: LITO (low income tax offset), LAMITO (low and middle income tax offset) and SBITO (small business income tax offset). There is also SAPTO (the seniors and pensioners tax offset) which we will ignore as not everybody qualifies.

What is an offset? It’s also called a rebate. And it nearly always has a strict meaning: it means that it can reduce tax to zero.

It never goes negative though. In other words; you can’t get cash. That said, there is the rather well-known “offset” which does in fact give you cash; the franking credit offset.

The Kitchen Table: Penny the pensioner pays the kids’ private school fees with her franking credits pension

This, the increasingly renowned franking credit offset, once behaved like a proper offset, that is, no cash. However former PM John Howard changed it so that any unused offset was paid out in cash.

It is this cash component which has recently captivated the minds of Shadow Treasurer Chris Bowen, the cousins Tim and Geoff Wilson and a senate committee.

For once, we will ignore this cherished and celebrated franking credits offset as it only applies to the owners of shares.

We include however the top end “super contributions surcharge” (Division 293 tax) which starts at $229,469 (before 9.5 per cent compulsory super of $20,531 – the maximum super that employers are obliged to pay on salaries above $216,120).

We also assume that affected taxpayers contribute no extra super and bear the 15 per cent surcharge themselves, rather than opting to have their fund pay it.

You may have been led to believe that $18,200 is the upper end of the tax free bracket but it’s really $21,595, as the following table shows.

True Marginal Rates

< $21,595nil
$21,596 to $21,98019.00%
$21,981 to $27,47529.00%
$27,476 to $37,00021.00%
$37,001 to $48,00033.00%
$48,001 to $66,66736.00%
$66,668 to $90,00034.50%
$90,001 to $125,33340.50%
$125,334 to $180,00039.00%
$180,001 to $229,46947.00%
$229,469 to $250,00062.00%

(We have factored in Medicare, plus the effect of LITO and LAMITO offsets as well as the super contributions surcharge.)

Bear in mind, your Marginal Rate (right hand column) is the tax take on your next dollar. And that’s what is producing the strange numbers here).

Also bear in mind that the adult national minimum wage for 38 hours work is $37,400 (a Fair Work Commission determination).

The unusual twitches in the rates and the additional tax brackets arise because of three things:

  • At the bottom end, Medicare “fades in” rather brutally,
  • in the middle, both LITO and LAMITO “fade out”; first, at just under $67,000 and finally at just over $125,000. And, at the top, the super contributions surcharge “fades in” rather brutally,
  • Depending on next week’s Federal Budget, there’s a “sweet spot” at $48,000 where the offsets combine nicely to provide their maximum benefit at $810.

Why does this matter? There are some enormous skews in these rates. For most workers, the true marginal rate is not what they think.

Budget forecast

It will be interesting to watch the Budget and compare the numbers. Will the Government pre-empt Labor’s living wage by targeting benefits to low income earners or will they go for “the base” and deliver Howard-Costello middle-class welfare?

It is a fair bet somebody at Treasury has given Josh Frydenberg a nudge and suggested he tweak the offsets, perhaps soften the Medicare fade-in and fiddle with the super surcharge fade-in and LITO and LAMITO to try to drive home political advantage by claiming a nice increase in take home pay for the greatest number of people.

The Facts of Life: Qantas, the CBA and the Franking Credits Factory

Coming up: what SBITO (small business income tax offset) does to the marginal rates.

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