What does income splitting mean for Australian households?
Income splitting is when double income households are able to spread their collective income over both incomes, considering you are self-employed. In order to lower each under the tax free thresholds. This means a family can gain more savings from income tax from having two incomes. The use of these arrangements are used to create an entitlement to tax deductions.
Shared tax arrangements are not uncommon, with around half of all OECD countries having some form of shared tax arrangements, along with those for parents and children. While in Australia you can have shared tax arrangements with your spouse (of a lower tax bracket), Australia doesn’t have shared tax arrangements in place for parents and children. If Australia were to implement such changes, it would remove the problem of so-called ‘middle-class welfare’ by encouraging family self-provision, and allow people to take care of their own families. As where these arrangements can be used it can result in significant tax savings for families. This would increase the amount of disposable income for one to spend on education, healthcare, and housing.
As double income families have access to two tax free thresholds whereas single income households only have one. Meaning that two families, earning the same income and making the same contribution to the economy, are treated with significant difference under Australia’s taxation rules. Disparities like these spread across income levels. Directly placing at a disadvantage single households with an annual income of $120,000, accruing an extra $10,000 net tax payment, than a double income family with the same income. This is not a fair tax that delivers a $10,000 a year difference between two families with the same pre-tax income. People with similar means should pay similar amounts in tax.
This unfairness between the single and double income households results from the high tax-free threshold of $18,200 for single income households. Whereas, double income households do not require to pay tax until reaching an income above $36,400, double that of the single income household. This impacts upon those single income families, struggling to find early childhood education and care at a location, price, quality, and hours that are suitable for both parents to find employment.
The Parliamentary Budget Office estimates a tax-free threshold sharing policy would cost $1.5 billion per year, however this is a much lower amount than the $7 billion a year we already spend on childcare facilities, services and fee assistance rebates. While, a policy could lower its costs by means testing, or restricting it to families with children of a young age, to increase the benefits for stay-at-home parents.
To allow a couple with dependent children to transfer an amount of income equivalent to the tax free threshold from the higher income earner to the lower income earner for tax purposes. This would in effect give single income couples access to the same tax free thresholds as dual income couples. The program, would deliver tax relief to upwards of $800,000 families, putting around $1.5 billion per year back into the pockets of working families, based on the per couple cap of $2,000 annual total tax relief estimate.
There should be more consideration from the Australian tax system toward families, to provide tax relief to those with young children. As Australia’s social security system, family law and child-support arrangements all assume that family income and assets are shared between family members. It would not take much effort for the Australian Taxation Office to extend income splitting for parents and children. A fair system would allow households the right to keep all or more of their income.
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