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My Saving and Tax Rates

April 19th, 2007 at 02:53 pm

It's a bit hard to work out exactly what my savings rate is. Apart from my salary I also get dividend income from my stock portfolio, but the dividends are mostly used on paying interest on my margin loans. To simplify things I did a calculation of my direct savings as a percentage of my gross salary:
Saving stream % of salary
Employer Superannuation contribution 8.25 % (The 9% SGL as a % of total salary including the SGL)
My Superannuation contribution 11.62 % (as a pre-tax "salary sacrifice")
Other savings/investments 9.72 %
TOTAL Savings Rate 29.60 % of gross salary

I've included principal repayments off my portion of our home loan as part of my "savings" but haven't included the interest payments on our home and investment property loans.

I also did a rough calculation of what taxes I'm paying:
Federal - Income tax & Medicare levy 13.81 %
State taxes - Land tax & GST* 3.72 %
Local taxes - council rates 1.28 %
TOTAL Tax Rate 18.81 % of gross salary
or 31.17 % of taxable income

* although the GST rate is 10%, unprocessed food is GST-free, so the average GST on my grocery bills is only 1.86%

The federal tax is based on the tax rate applicable to net "taxable income". It's a bit misleading to quote it as a percentage of gross income, as it includes tax paid on dividend income. State and Local taxes are a function of consumption (GST) and real estate assets (land tax and council rates). As a percentage of my Net Worth my annual tax bill is a much more modest 1.51%. But this figure doesn't include taxes paid on superannuation fund earnings (@ 15%), superannuation pre-tax contributions tax (@ 15%) or any Capital Gains Tax (@ half my marginal tax rate, say 15%) on realised gains. However, if I move assets into my superannuation fund and only realise gains when it is "pension" mode (after age 60), there would be much less capital gains tax due.

We have no gift tax or death duties in Australia, which helps with intergenerational transfer of wealth.

Overall, it appears that income from all sources (salary, investment income, capital gains) ends up being taxed at around 15% on average, with little "double taxation" occurring (due to franking credits and no gift tax or death duties). And the new "simple super" offers good opportunities to greater reduce tax on capital gains by realising such gains during retirement.

Text is Enough Wealth and Link is
Enough Wealth

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