BEWARE THE POVERTY TRAP
CASE STUDY: Karen is a single pensioner who earns $20,000 a year from a combination of aged pension and investments. Due to the budget changes she pays no tax and does not need to prepare a tax return. She receives a legacy which, when invested, gives her an extra $1,000 a year of taxable income. Immediately her pension will drop by $400. But, because her taxable income of $20,600 is above the Medicare levy exemption limit she will become liable for Medicare levy on the entire $20,600. This will cause her to lose a further $309.
There’s much more. Next will be a tax of 30% on the extra $600 of earnings, which will take a further $180, and she will also lose $75 in pensioner rebate. It tapers at the rate of one dollar for each eight dollars earned. Thus she has lost $964 out of the $1,000 earned!
The outcome would have been different if Karen had invested the money in insurance bonds because they do not add to an investor’s taxable income. The bonuses accrue, and are reflected in a steadily growing bond value, which can be redeemed at the end of 10 years tax free.
Even though Centrelink will deem the earnings on the bond at the standard rate that applies to all investments there will be no additions to Karen’s taxable income for the year. Thus she will not be required to lodge a tax return nor will she be liable for Medicare levy or suffer loss of pension rebate.
If Karen needed some extra money before the 10 year period had passed, she could always make a whole or partial withdrawal of the bond, and only the realised investment growth would be included in her tax return in the year of withdrawal. In any event the withdrawal itself would carry a partial tax credit, which may eliminate most of the tax on it.
The impact of the extra income on Karen is similar to that suffered by a job seeker who is currently receiving a benefit. Once their income reaches a level where the combination of their benefit and earned income exceeds $20,000 a year they will suffer an effective tax on any extra earnings.
|
