Australia’s rich pay only 25 per cent Tax

Australia's wealthiest people are paying only 25 per cent of their income in tax and are easily avoiding the top personal rate of 47c in the dollar.

The very rich pay less than a third of the tax paid by the nation's highest-paid workers - $28,000 versus $92,000 a year - because they use their investments to minimise income and claim tax breaks not available to regular workers.

The Coalition Government says that only 3 per cent of taxpayers, with taxable incomes above $125,000, will face the top marginal rate of 47c when the thresholds are lifted again on July 1 next year.

But the top 2 per cent of the nation's wealth holders won't be among the people on the 47c band, based on the evidence from the Melbourne Institute's survey of the nation's 3.6 million working households.

The figures show the extremely rich generally declare taxable five-figure incomes to the tax office after counting their deductions.

The wealthiest Australians and the nation's highest earners are two very different groups, according to Bruce Headey, the deputy director of the Household Income and Labour Dynamics in Australia survey.

Peter Costello has tried to hose down calls for a reduction to the top personal tax rate of 47c by arguing it will amount to a tax cut for the richest people in Australia. As an example, the Treasurer has said lowering the top rate will deliver a healthy tax cut to Kerry Packer.

But the research shows that people facing the top rate are not the rich, but their well-paid employees.

To explain the tax gap, the Melbourne Institute has created two ladders: for wealth and for income. Entry into the first elite group - the top 2 per cent of wealth holders, covering 72,000 households - requires at least $2million in assets owned outright. To make the grade for the second elite group - the top 2 per cent of earners, also covering 72,000 households - requires an income of more than $200,000.

"In the top 2 per cent of earnings, most people get nearly all income for wages and salaries," Associate Professor Headey said. "They may feel like regular wage-earners even though they make a hell of a lot."

By contrast, the top 2 per cent of wealth holders draw a significant level of their income from business investments and shares.

Associate Professor Headey said the top wealth holders enjoyed the higher living standards because wealth was more stable over the long haul than income.

The typical elite wealth holder has $2.4million in assets, but earns just $112,000 in gross income, on which they pay $28,000 in tax after deductions of up to $30,000. The total tax rate is 25 per cent, which is a figure normally associated with middle and upper-middle earners.

Median income for the elite earning household is more than double that, at $268,000, and tax paid is $92,000 -- almost four times what elite wealth holders pay. Total tax rate is 34.3
per cent. The elite earner household owns just $1.15million in assets.

The middle-income household is a world away, with a median income of $63,000, a tax bill of $12,200 and a total tax rate of 19per cent. Their asset base is $200,000, which is their share of the family home after subtracting the mortgage still owing.

The analysis deals with the sharp end of the tax debate -- the 3.6 million households in which the head is in the prime of life, aged 25-54 years.

Student and retiree households, including early retirees, have been stripped out to ensure the study concentrates only on those of working age.

Wealth includes the family home and is defined as assets minus debt.

The elite earner in the top 2 per cent of the income distribution would not qualify for the top 10per cent of wealth holders. Similarly, the very rich in the top 2 per cent of wealth holders would not make it to the top 10 per cent of earners.