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How Individual Tax Rates Work
The amount of income tax and the tax rate you pay depends on how much you earn as well as your circumstances. In simple terms, the more you earn, the higher your rate of tax. As the rates change year-to-year, it’s helpful to take a look at the upcoming period so you know what to expect. In particular, new changes to the Medicare levy threshold and low and middle income offset may affect you.
Rates from June 2021 – June 2022
*The above rates do not include the Medicare levy of 2%
Medicare levy threshold and rates
Your Medicare levy is reduced if your taxable income is below a certain threshold; in some cases, you may not have to pay the levy at all. As of the 2021 income year, the Medicare levy low-income threshold is increasing for singles, families, seniors, and pensioners.
- Singles — from $22,801 to $23,226.
- Families — from $38,474 to $39,167. For each dependent child or student, the family threshold will be increased by an additional $3,597 (previously $3,533).
- Single seniors and pensioners — from $36,056 to $36,705.
- Family seniors and pensioners — from $50,191 to $51,094.
Retaining the low and middle income offset
A tax offset is a financial benefit from the Government that reduces the amount of tax you pay on your taxable income. Although it was due to be removed from July 1 this year, the Government will be retaining the low and middle income tax offset (LMITO) for one more income year, making it available for the 2022 income year.
You don't need to complete separate form or section in your tax return to get this tax offset — the ATO works out the amounts on your behalf when you lodge your tax return (if you’re eligible). As always, in order to benefit from this offset you need to be an Australian resident for income tax purposes, pay tax on your taxable income, and that income needs to be below certain income thresholds.
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You’ve likely heard the adage: "The only certainties in life are death and taxes." While death and probate taxes were abolished in Australia by the early 1980s, a potential "inheritance tax by disguise" could still be lurking in your superannuation or pension fund… The good news? With the right planning, this tax burden is avoidable . At Ascent Accountants, we’re here to empower you with the knowledge and strategies to optimise your financial legacy. Here's what you need to know about managing taxes on your super and leaving more for your loved ones. Why your super might be taxed after you’re gone. Superannuation funds enjoy generous tax concessions while you’re alive: Accumulation phase: Earnings are taxed at just 15%, with a reduced 10% tax on capital gains. Pension phase: Balances up to $1.9 million are completely tax-free. However, a tax trap arises when super funds are passed to non-dependent beneficiaries (e.g., independent adult children). In such cases, a lump sum death benefit can attract a tax of 15% or 30%, plus a 2% Medicare levy. On the other hand, funds transferred between tax-dependent beneficiaries, such as between spouses, are not taxed. Understanding this distinction is key to effective estate planning. Strategies to minimise or eliminate super taxes. 1. Understand the taxable component. Only the taxable portion of your super balance is subject to this tax. By assessing the taxable versus tax-free components of your fund, you can calculate the potential tax liability for your beneficiaries. For young, healthy retirees with a long retirement horizon, the tax savings from super's concessional tax environment may outweigh the risks of tax on their death. However, older retirees or those with health concerns might find the potential tax liability for beneficiaries outweighs the benefits. 2. Withdraw funds from super. If you decide the risk of tax to your beneficiaries is too high, consider withdrawing funds from the super environment. These funds can then be invested in your name or another structure. Just remember that this is a complex decision requiring tailored advice to ensure your financial security while managing tax implications. 3. Implement a re-contribution strategy. A re-contribution strategy aims to increase the tax-free component of your super balance. You simply withdraw funds with a high taxable component, then re-contribute them as non-concessional contributions. While this approach can significantly reduce the tax liability , it must be executed carefully due to restrictions like contribution caps , work test requirements (for those over 74), and total super balance limits. In some cases, contributing to a spouse’s super fund can offer additional benefits, such as improving Centrelink eligibility. 4. Nominate your estate. Funds paid directly to non-dependent beneficiaries from super are subject to the Medicare levy. By nominating your estate as the beneficiary and having funds distributed via your will, this 2% levy can be avoided. However, directing benefits via your estate has its drawbacks. It’s vital to weigh this option against alternative strategies, especially if direct beneficiary payments better align with your financial goals. 5. Appoint a power of attorney. While your will is essential, an enduring power of attorney is equally important. This person can make financial decisions on your behalf if you become incapacitated, ensuring the best outcomes for your beneficiaries. Take the next step towards financial certainty. Want to ensure your beneficiaries receive the maximum benefit from your hard-earned wealth? We specialise in helping individuals and families navigate these complexities . From re-contribution strategies to estate nominations, we provide personalised guidance to protect your financial legacy. Reach out to Ascent Accountants . Together, we can develop a strategy to minimise taxes and maximise your legacy for the people who matter most .
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