Note: Previously, in rare bipartisanship, the ALP supported the Coalition’s decision to temporarily increase the marginal tax rate by 2 percentage points for those Australians earning more than $180,000. The higher tax rate became law, and applies from 1 July 2014 until 30 June 2017 (3 financial years). In the 2016 Federal Budget, the Coalition confirmed it would cease the TBRL as legislated, but the ALP had announced that it would re-introduce the levy if it won the 2016 Federal Election on 2 July, which it didn’t win. With the re-election of the Coalition government, the TBRL will cease on 30 June 2017.
In the May 2014 Federal Budget, the Coalition government announced that from 1 July 2014, a Temporary Budget Repair Levy (TBRL) would be imposed on an individual’s taxable income exceeding more than $180,000. The TBRL (read ‘higher income tax’) became law, and is now 2% of any income above $180,000; which effectively means the marginal tax rate at that level has increased by 2% to 47% (plus 2% Medicare Levy).
According to the federal government, around 400,000 taxpayers would be affected, although we have not seen statistics to confirm or negate that prediction. The levy is intended to be TEMPORARY and to last for 3 financial years (from 1 July 2014 until June 2017). The Coalition government, re-elected at the 2016 Federal Election, has confirmed it will end the levy as legislated.
Obviously, when the TBRL was introduced, this was another broken 2013 election promise by the Coalition government, along with the proposed Age Pension age increase (for background on the failed attempt to increase the Age Pension age beyond age 67, see SuperGuide article Age Pension age increasing to 67 years (not 70 years)).
How does the debt tax, or TBRL work?
At the time of the TBRL announcement, the big question was, how will the federal government measure a person’s income to determine if the person earns more than $180,000 a year? As expected, it is simply based on taxable income, as per an individual’s tax return. Presumably, that means salary sacrificing into super, or negative gearing into property, or taking out a margin loan on shares, could help someone avoid the TBRL, and the top marginal tax rate of 45% plus 2% TBRL plus 2% Medicare levy.
Only taxable income above $180,000 is hit with the TBRL. For example, an individual with a taxable income of $200,000 will pay an additional 2% on $20,000 of income, or $400. While an individual with a taxable income of $300,000 will pay an additional 2% on $120,000 of income, or $2,400. Earning a taxable income of $350,000 will mean $3,400 in TBRL.
Note: According to the government, the TBRL is also reflected in a number of other tax rates (see list at the end of this article) that are currently based on calculations that include the top marginal tax rate, such as fringe benefits tax. According to the government, to prevent high-income earners using fringe benefits to avoid the TBRL, the fringe benefits tax rate increased from 47% to 49% from 1 April 2015 until 31 March 2017, in line with the fringe benefit tax income year.
Not just high-income earners will end up paying the TBRL
Despite the media spin, those on $180,000-plus salaries are not the only ones who will be hit by the debt levy. Other taxpayers who may be hit with the debt tax include:
- low-income earning and middle-income earning individuals retiring (in the financial year they retire), and who take super lump sums
- investors selling assets such as properties or shares (in the year they sell)
- other individuals who receive lumpy income, such as small business people
Quoting directly from the ATO website, the Temporary Budget Repair Levy of 2% (in addition to the 45% top marginal tax rate) will apply to
- Individual taxpayers
- Unearned income of minors
- Trustees liable to taxation as individuals
- Trustees liable under section 99A
- Trustees liable under subsection 98(4)
- Non-complying superannuation funds
- Non-arm’s length component of the taxable income of a superannuation fund
- Non-complying approved deposit funds
- Non-arm’s length component of the taxable income of an approved deposit fund
- Non-arm’s length component of the taxable income of a pooled superannuation trust
- Non-TFN contributions income to a superannuation fund or retirement savings account provider
- Share of the net income of a partnership attributable to a partner not having control and disposal of that income
- Family trust distribution tax
- Fringe benefits tax (commencing 1 April 2015)
- Income tax on bearer debentures
- First home saver accounts misuse tax
- TFN withholding tax for employee share schemes
- Departing Australia Superannuation Payments tax (3% increase for payments from a taxed superannuation fund and 2% increase for payments from an untaxed superannuation fund)
- Excess non-concessional contributions tax
- Excess untaxed roll-over amounts tax
- Trustee beneficiary non-disclosure tax No 1
- Trustee beneficiary non-disclosure tax No 2
- Interest on non-resident trust distributions
- Untainting tax
- Trust recoupment tax
Table source: ato.gov.au
For information on the other 2016 Federal Budget superannuation announcements see SuperGuide article Latest superannuation rules: 2018/2019 guide.