It’s little wonder the phrase ‘bracket creep’ summons up images of spiders and other nightmarish creepy-crawlies.
While it’s not a bad thing to earn more money, get a raise, or have your salary adjusted with inflation, unwittingly jumping into a higher tax bracket can negate any fiscal gains you make from the added income. The government 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 punter:
Jackie earned $78,000 per year as an accountant. She sat in the $37,000 – $80,000 tax bracket, so her income was taxed at 32.5%*. Her employer offered her a raise of $3000 per year. Jackie was thrilled to earn $81,000 per year, but she unknowingly crept into the next tax bracket. The tax rate for her new bracket ($80,000 – $180,000) is 37%**. Despite only just entering the higher bracket, her base taxable income has leapt by $1200 per year. In effect, Jackie’s higher salary isn’t as high as it looks before tax.
Jackie is a bit frustrated with her new tax obligations, but like all taxpayers she has some options to circumvent the burden. Here they are.
1. Salary sacrifice the additional income
Instead of accepting the higher salary of $81,000 as purely taxable income, Jackie decides to sacrifice the extra $3000 into her super. That way, her taxable income is reduced to $78,000; she stays in the lower tax bracket; and that $3000 yearly super injection ends up being taxed at only 15%. 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 reduce your taxable income year-on-year AND get a nice new set of wheels.
2. Negatively gear against 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.
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, or technical resource expenses may provide more advantageous if deducted later rather than sooner.
*Discounting the Medicare and budget deficit repair levies. **Discounting the Medicare and budget deficit repair levies.
#[bracket creep], [Joe Hockey], [negative gearing], [negative gearing Melbourne], [salary sacrifice], [smart investor], [smart money], [Tax Office]
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