Paul Keating’s argument that the top income tax rate should be much
closer to the 30% company rate is reasonable on the surface, but last
night’s budget does go some way towards eliminating the lurk.

This is because the company tax rate is a flat 30% from the very
first
dollar of profit. As the following table shows, anyone earning less
than $142,875 a year is better off being an ordinary salary earner
rather than an incorporated company.

Income/profit Company tax PAYE income tax
$6000 $1800 zero
$25,000 $7,500 $2,850
$75,000 $22,500 $17,850
$142,875 $42,862 $42,862
$150,000 $45,000 $47,850
$200,000 $60,000 $70,350
$500,000 $150,000 $205,350
$1,000,000 $300,000 $430,350

Whilst GST, super, dividend imputation, accelerated depreciation and
capital gains tax all need to be taken into consideration, any small
business operator should immediately give themselves a salary of
$142,875 in 2006-07 and simply take any extra income as profits in the
company. The equivalent figure in 2005-06 is $119,142, so we’re talking a 20% increase.

Keating was right to point out that discounted capital gains tax has
also become a major lurk. If I sold Crikey for a $1 million profit in
2006-07, the tax bill would be $225,000 or 22.5% – half the new
top marginal tax rate of 45%. The same deal last year would have
attracted CGT of $235,000, but if the sale had occurred before the CGT
discount was introduced in 2000, the CGT would have been a hefty
$470,000.

The huge disparity between receiving income as capital rather than
salary or profit is now a far bigger lurk than the old small
businessman incorporating to save a few bob. This explains why so many
CEOs of listed companies are on huge equity schemes. If they hang onto
the stock for 12 months they only pay 22.5% on any profits: far better
than paying the reduced top rate of 45%.

Peter Fray

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See you in 2021.

Peter Fray
Editor-in-chief of Crikey

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