The marginal rate of tax or MRT is the percentage of tax you pay on the last dollar of income earned. It doesn’t mean that you pay that % overall, just on the amount of dollars that are in the highest tax bracket you fall into.
Tax rates 2019-2020 (excluding the Medicare Levy of 2%)
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||32.5c for each $1 over $37,000|
|$90,001 – $180,000||37c for each $1 over $90,000|
|$180,001 and over||45c for each $1 over $180,000|
While someone on say $92,000 is in the 37% (39% with Medicare) marginal rate, in practice they would probably pay approximately 25% of their income in tax. This is because some of their income incurs ZERO tax and some 19% and some 32.5%.
Australia has a progressive system of income tax. The more you earn, the larger proportion of tax is paid.
As opposed to say the GST; which is a flat rate of tax for all, and therefore more of a burden on low income earners than it is for higher income earners.
It is a regressive tax
Tax brackets are adjusted to achieve more equitable tax system.
‘Bracket creep’ occurs when incomes rise as a result in inflation and tax-payers are forced into higher marginal rates of tax. They can’t buy more with the ‘extra’ income because it is a result of inflation (general increase in prices) and so they are negatively impacted.
Tax liability is based on’ taxable income’ – gross income minus any allowable deductions.
Rental income from an investment property is considered income and as such is added to your taxable income
BUT all the costs of ownership can be deducted from your gross income as can depreciation.
The rate at which you can claim rebates from the ATO is at the highest marginal rate of tax that you fall into.
‘Tax minimisation’ through negatively geared property investment is legal and an Australia Tax Office supported tax strategy.
It is important to keep accurate records of all expenses. A Quantity Surveyor’s Report (QSR) professionally prepared for every investment property is important to ensure that the maximum depreciation benefits are claimed.