A bunch of bunchers – how people tweak their income to sneak below the tax rates

Self-employed Australians and people with family trusts are choosing their own personal income tax rates while wage and salary earners bear the full force of the progressive tax system, ground-breaking research has revealed.

In some cases, there are 50 times more people than expected just below the point at which they would move into a higher tax bracket, with most using trusts.

The Australian tax system is filled with bunchers – people who manage to adjust their taxable income just below particular tax rates.Credit: Dominic Lorrimer

Based on 189 million tax records collected between 2000 and 2018, the research compiled by academics at the Australian National University and Sydney University, looked into an issue known as “bunching”. This is where taxpayers’ income gathers at or just below a particular tax threshold.

The researchers found that ordinary wage and salary earners were unlikely to bunch around the major changes in the tax system – where the tax-free threshold ended or where the current 19 per cent, 32.5 per cent, 37 per cent and 45 per cent tax rates started.

But there were large numbers of the self-employed and those who drew income from family trusts at those change points, with far more people just below the new rate than there should be.

Just below the $180,000 threshold, where the 45 per cent tax rate starts, the researchers found self-employed people with a spouse and children who drew income from a trust were 50 times more likely to be present than if there was no change in the tax rate.

At the 37 per cent tax rate, the number of self-employed people with a spouse and children who drew income from a trust were almost 52 times more likely to be present.

The researchers found women drawing income from a trust were among the biggest bunchers at key turning points in the progressive tax system.

One of the report’s co-authors, ANU tax expert Bob Breunig, said Australia’s large number of tax deductions coupled with the family tax system enabled people to move their marginal tax rates.

“It shows there’s a lot of manipulation in the system with trusts being used to move income around. It’s the self-employed and people with trusts doing it,” he said.

Breunig said bunching would continue under Prime Minister Anthony Albanese’s revised stage 3 tax cuts, as it would have if the original plan – under which the 37 per cent tax rate was to be abolished and the threshold for the 45 per cent rate lifted to $200,000 – had gone ahead.

He said the large survey showed how people structured their income to fall just below new tax thresholds for long periods of time.

“You don’t make $179,999 for five consecutive years without a pay rise,” he said.

In its annual examination of tax concessions this year, Treasury revealed about 1.7 million people reported almost $60 billion in net income from trusts in the 2021 financial year, equivalent to 11 per cent of all taxpayers lodging a tax return.

ANU tax expert Bob Breunig says the complex tax system encourages “bunching”.Credit: Rhett Wyman

There is some appetite for change to the family trust system. The Resolve Political Monitor, conducted for this masthead by research company Resolve Strategic and released on Tuesday, found 39 per cent of respondents believed tax concessions on trusts should be reduced, with 22 per cent opposed. Another 39 per cent were unsure.

The researchers found trusts were not the only way people changed their tax. A “significant” number of self-employed people without trusts also gamed the system.

They said the different corporate tax rate – 30 per cent for large businesses but 25 per cent for small companies – and the ability to defer income to other years and bring forward expenses all helped this group to in effect choose their tax rate.

The research showed the introduction by the Australian Taxation Office around 2008 of tax return pre-filing and greater use of data-matching slightly reduced the amount of bunching before it stabilised in recent years.

Independent economist Chris Richardson said Australia’s tax system gave people incentives to bunch.

He said the government should consider reforming the trust system and making the company tax rate consistent across all businesses.

“That wouldn’t solve bunching, but it would lean against it,” he said.

“A more complicated move worth considering is allowing a halfway house between taxing individuals and taxing families – that is, allowing wage slaves a degree of ability to hand money to family dependants as well.”

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