The Australian taxation system has been headlining the news in the last few weeks, with words like "immoral" levelled at the current system in place. Some argue it's contributing to significant inequalities across class and generation.

Anglicare Australia recently published a damning review into wealth inequality in Australia, showing how the gap between rich and poor continues to widen, with a small percentage of Australians hoarding most of the country's wealth. To put it in perspective, the report found the average wealth of the top one-fifth of income earners was $3.2m, 90 times that of the lowest earners, who have just $36,000 to their names.

You've probably seen too the announcement that the Commonwealth Bank of Australia turned at $9.8 billion profit during a cost of living crisis. It's raised eyebrows. Coles and Woolworths also announced a $1.1 billion and $1.7 billion profits respectively.

In response to the continued posting of billion-dollar earnings at a time when many Australians couldn't even afford to turn on their heater over the winter months, the Greens has proposed urgent tax reform. Leader of the Greens, Adam Bandt, used his National Press Club address to propose a new tax structure around corporations who generate "excessive profits" - arguing these excessive profits should be taxed at a higher rate. Naturally, it has stirred up heated feelings across the board.

Regardless of how you feel about the Greens proposed answer to corporate profits, there's no denying that the divide between the socio-economic classes in Australia is wider than ever. It all feels very "let them eat cake".

So why is this happening? And why are some experts and organisations arguing that Australia's tax system is wholly unfair - especially to young people. It's obviously a big question with complicated answers. But there are a few core tenets to our tax system that we can look at to better understand how we got here.

 

62% of our government income comes via individual income taxes

Australia applies most of its tax pressure to the working population via income tax. In fact, we have the highest rate of tax from income (personal and company) out of any country in the developed world. For nations similar to us, the tax burden on individuals is 34% on average.

In 2020 47.2% of government revenue came just from personal income taxes. That's you and me. When you consider you have mega-corporations and banks recording 10 billion dollar profits each year, you would imagine most of our tax funding should come from corporate taxes or at least from these high earning businesses, no? Perhaps a levy on excessive profits like the Greens have proposed could be a fairer way forward?

Or maybe we should be looking more closely at big Australian mining companies? The natural resources of Australia belong to all of us, the Australian people. But in many cases, big mining companies are allowed to take these precious and finite resources in exchange for very little compensation to the public purse.

In 2021, Australia overtook Qatar as the world's largest exporter of natural gas. Qatar actually generates so much revenue from its mining exports that it doesn't need to charge its population an income tax at all. In fact, Qatar collects 20-times more revenue on its gas exports than we do. For context, that's around $76 billion collected in 2023 while we only collected $2.6 billion. Sadly, this is also the most we've ever collected from the global energy giants, and in recent years, the number has actually been less than $1 billion.

As time goes on, the country becomes more and more expensive to run. We have an ageing population that require care and increased access to Medicare. Higher interest rates means that Government debt is more difficult to service. More people means more infrastructure requirements. And the burden to pay for all of this sits mostly on the working-aged tax payer - rather than increasing the tax burden on big companies that seem grow their profits - sometimes astronomically - every single year.

There are many ways for governments to increase revenue without relying so heavily on individuals. But instead, we're left with a system that is largely inequitable, particularly for younger people.

 

Money made from labour is taxed at a higher rate than money made from assets

Think about this: if you work a job and make $100,000 in 12 months - you will pay income tax on $100,000.

However, if you buy a property and after 12 months, you sell it for $100,000 profit - you will only pay tax on $50,000. Both parties made $100,000, but the investor is taxed far less than the person who toiled.

This is because of the capital gains tax discount (or CGT discount). It means that if you hold an asset for 12 months or more, you only need to pay tax on half of the profits. This applies to any asset, from property, land, shares and even cryptocurrency.

To state the obvious, the people most likely to be able to hold profitable assets in 2024 are those who are already wealthy. Purchasing a money-making asset involves having the funds to invest a down payment, or to simply buy it outright. As such, the CGT discount means that people who are already wealthier are able to pay less tax on the profits they make than people who cannot afford to purchase assets.

Additionally, making money from assets is a tactic that you can stack. This is because making money via assets does not involve exchanging your time for money. You can buy asset after asset and make money in the background, with very little time investment required.

Couple this with the CGT discount which makes it so financially-attractive to make money via assets, those with the means choose to buy a lot of them. And they're usually houses.

Where does this leave us?

Well, people who have to exchange their time for money - like going to your job each day - are taxed in full. Meanwhile, those who are wealthy enough to make money from assets like houses, buy lots of them, driving the price of housing up which tends to have the best long-term capital gains return.

Again, another one in the "cons" list for young Australians.

 

Negative gearing is easily manipulated

Ultimately, and perhaps boldly, I don't think the principle of negative gearing is fundamentally wrong. I know this is a very bold statement to make, but simply, if the costs exceed the income you make from a housing investment, the property is considered "negatively geared". If you make more than the costs, the property is "positively geared".

Negatively gearing a property allows people to deduct their costs from their earnings on a housing investment. If you own a property as an investment, and you're paying tax on the rent you get from that property, you can tax deduct the expenses you pay. Fair enough.

The problem comes where this system is misused and manipulated. And it so often is.

The costs that you're allowed to deduct include things like strata costs, council rates and maintenance or improvement costs. Additionally you can also deduct the bank interest that you pay on a mortgage used to buy the property and the depreciation of the fixtures inside the property. These last two line items are the ones that opponents of negative gearing take issue to, as they can be manipulated to minimise the true earnings of the property.

Let's say you get a rental income of: $30,000 per year. Your strata rates are $1500 per quarter, your council rates are $500 per quarter and the interest on your loan is $1500 a month. This totals $26,000. Meaning that your rental income earning comes down to just $4,000.

But if you can argue that the depreciation on the fixtures is $4000 a year or more, you could pay no tax on this earning. And if the costs somehow exceed the rental income earned, you will have technically incurred a loss which you can use to reduce the amount of tax you pay on other streams of income.

That "loss" can also be carried forward into other years if you do not have an income stream to deduct it against in the current financial year.

 

Franking credits can be paid as cash refunds

A franking credit (or dividend imputation credit) is a type of credit or tax refund you receive on dividends.

To break it down: when you own shares, you own a literal share in that company. So when companies make a profit, you will get a share of that profit. This is called a dividend. Companies are subject to company tax, and often pay this before paying you your dividend. This means that a certain amount of tax has already been paid on this money before it comes to you. When you come to pay your own income tax, you could receive the tax already paid by the company as a franking credit.

Prior to 1987, your dividends would have been subject to the company tax and then your own income tax. But the Keating Government introduced a system that would give individual tax payers a credit for the tax the company had already paid, and the dividend would only be subject to your personal income tax.

Let's say you get a dividend of $1000 and the company that paid it to you had to pay $300 tax on that money before it arrived in your bank account. This means that when you're doing your taxes and tallying up how much you earned (including dividends and bank interest), you will have a $300 franking credit and can reduce the amount of tax you pay overall.

In 2001, John Howard slightly tweaked the franking credit scheme with big results. He amended the protocols to actually allow for a cash refund to be paid where individuals have no taxable income, or income below the taxable threshold. Of course, this largely benefits retirees who often have large investment portfolios via superannuation or other shares, but no working income. It means that if their money and dividends earned falls below the tax-free threshold, the Government will write them a cheque for the value of their franking credits at tax time.

It means that you can earn money via dividends and then ALSO have the Australian tax payers send you additional money on top of these dividends. This tax loophole - which mostly benefits retirees and the wealthy - is estimated to soon cost the people who actually do pay tax a massive $8 billion a year. It not hard to see why it's a controversial policy, or how it negatively impacts the young.

 

The family trust system is often used by wealthier people to avoid tax

Family trust arrangements are available for all Australians to use and benefit from, however, these arrangements tend to be used by older and wealthier Australians who have the means to set them up. Because - of course - there is a cost to setting up a trust.

Trusts can often be used to shelter large sums of money from being assessed as taxable. One way the trust system can be manipulated is via "income splitting". High-income earners can assign earnings to lower-income family members to have the earnings taxed at a lower rate.

Another way some people manipulate the trust system is by interlinking multiple trusts and stacking them. This makes chasing a paper trail very difficult, making it potentially easier to conceal money, or move money around in a way that you can avoid paying tax on it.

By conservative estimates, trusts are sheltering between $672 million and $1.2 billion a year.

 

Why should you care?

Simple: "Every dollar of a tax subsidy is a dollar that has to be paid by another taxpayer." It's a line I read in a proposal on discretionary trust reform.

There is a certain amount of money we need as a country to keep everything running, and all the tax that is "minimised" or "avoided" needs to be paid by someone else. Typically someone who already can't afford the skyrocketing cost of living, or young people, who have the deck stacked against them financially.

When big businesses or high-wealth individuals avoid paying their share of tax, it means that the middle income and low income individuals are the ones that have to make up the gap.

And that's not fair on any of us.