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#TaxTipTuesday - What is a tax deduction really worth?

If we had a dollar every time we were asked "If I spend $1 on a deduction, what is it worth?", we would be millionaires!  So here's the answer!

Do you know the difference between an average rate of tax and a marginal tax rate?


Your average rate of tax is the total amount of tax that you have paid divided by the total income you have received.


The marginal rate of tax is the rate of tax that you incur on each additional dollar of income.


In Australia, these marginal rates of tax increase as you earn more income from as low as 0% to as high as 45% (not including the 2% Medicare levy).


The tax free threshold for the 2017/18 year was $18,200 and therefore you are not required to pay any tax until you earn over $18,200.  You can earn considerably more when you factor in a low income tax offset or senior and pensioner tax offsets.  These are often referred to as "tax brackets".


"The average wage in Australian in 2016 for full time earners was $78,832. "

What's it really worth?


The average wage in Australia in 2016 for full time earners was $78,832.  I don't know how they calculate that average but that is the average according to the ABS

On that income, the income tax payable is $17,167.  This represents an average rate of tax of 22% and the taxpayer is currently in the 32.5 cent tax bracket.

For every dollar now spent by this taxpayer, in that tax bracket, it will represent a 32.5 cent refund for him.


As the "average" taxpayer earns more income, there is a chance that his/her marginal rate of tax will increase from the 32.5 cents in the dollar now up to the next "tax bracket" which is 37 cents in the dollar (after $87,000) and it will eventually peak at the maximum which is 45 cents in the dollar (when earning over $180,000).  As the marginal rate of tax increases, so does the return on the cost of each additional $1 spent on a tax deduction.

If you need assistance to lodge your 2018 return phone Ezetax on 08 9249 7422 or book a tax return preparation session either in the office or online with one our Team by booking a session here - www.ezetax.com.au.

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