Hope and hardship: Young Australians’ taxing battle for economic equality

Something intangible has characterised Australians’ financial situations over previous generations: Hope. 

For the most part, we’ve been able to hope for a prosperous and secure future – for ourselves and, often moreso, for our children.

Indeed, we avoided a technical recession for nearly 30 years, from the early 1990s to 2020, when Covid broke our streak.

That’s not to say things have always been easy. 

It almost goes without saying that not all Australians have always had the ‘fair go’ promised by politicians past, present, and probably future. 

Now, however, for the first time in living memory, a generation of Australians could end up worse off than their parents were, the Grattan Institute warned in 2019. 

“Younger people are struggling to get on the prosperity ladder, where you finish university, get a good job, buy a home, put money away to save, and build wealth for retirement,” Thomas Walker, CEO of advocacy, education, and research organisation Think Forward told Savings.com.au.

A real change in conversation and outlook is happening, especially in the wake of the Covid pandemic.

“That trajectory of life is breaking down, whether it's because of HECS-HELP debts, the cost of buying a home ... and jobs are becoming more insecure,” Mr Walker said.

“There's a sense of injustice, that young people are stuck in rental properties as housing prices have gone up … but then at the same time, rental prices have gone up so much in the last 12 months.

“Then you look at landlords or property owners and they're getting billions of dollars of tax concessions. 

Where does the blame lie?

Too much onus on personal income taxes, distributed unfairly, and not enough done about other forms of income generation and assets is the crux of the argument.

Considering other OECD nations, Australia’s tax-to-GDP ratio is low, at 29.5% compared to the OECD average of 34.2%. However, when it comes to getting that tax, the land down under leans heavily on personal income and profits.

Nearly 40% of its total tax revenue comes from income tax, as per the most recent data available, compared to the OECD average of 24%. It also has a greater reliance on taxes born from corporate profits, property, and pay rolls than other nations, and a lesser reliance on the likes of GST and social security contributions.

Perhaps, then, it's unsurprising that young Australians have said they’re bearing the weight of the nation’s spending. Many feel they’re offering their income hand-over-fist in the form of taxation and not getting their money’s worth.

And many point to policies like negative gearing, capital gains discounts, and franking – each designed to reduce the income tax paid by those with income generating assets – as part of the problem.

The Grattan Institute notes these policies are creating a sort of ‘trickle up’ scenario. One in which older generations, having spent decades accumulating equity, are now both demanding more tax dollars than they’re providing and receiving the bulk of tax concessions.

On the other hand, some may argue that growing wealth and equity is and always has been challenging. That today’s young Australians don’t have it any harder than yesterday’s did. And that the tax concessions for those with equity are not only fair, but integral to encouraging investment and wealth creation. 

“These conversations, particularly around tax, are dominated by economists and when changes to the tax system are proposed it's pretty easy for older generations to mobilise,” Mr Walker said.

“But we have hope, in that younger generations are making up an increasing share of the electorate – I think 40% of voters in the next election will be Millennials and Gen Z."

Additionally, those advocating for a more “progressive” tax system, as per Mr Walker, are hoping to avoid a skirmish between Australia’s young and young-at-heart.

“We really want to work across generations,” he said.

“We don't want this to descend into generational warfare, where it just looks like we're yelling at Baby Boomers and accusing them of being greedy, because we're not.

“They've just taken advantage of the tax and economic settings that they have had access to. 

“There are definitely a lot of older people who completely agree with what we're saying, and they realise the economic system is leaving younger generations in a pretty precarious place.”

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The ins and outs of tax deductions: A brief overview

Now, without detailing the entire Australian taxation system, it’s important to outline how tax deductions and concessions work.

You might be used to using various methods close to tax-time to reduce your taxable income. For instance, if you’ve bought an office chair for your work-from-home setup - that’s tax deductible. However deductions extend beyond such scenarios and into wealth-creation items like properties and shares.

The argument for these deductions extending to wealth creation is strong, however the argument against generally focuses on the idea that it fuels speculation, distorts markets, and makes wealth creation less equitable for future generations.

Negative gearing and investment property deductions

If a person pays more to own, upkeep, and manage their investment property than they earn in rental income, they can claim the difference as a tax deduction. Expenditure on the property and mortgage interest are generally allowable deductions.

While negatively geared properties make up a fairly modest pool of the overall rental market, it’s become a hot buzzword used to highlight the unfairness of the tax system. That’s largely due to the fact you can negatively gear an unlimited number of properties.

While negative gearing is not generally recommended as a long-term property investment strategy, with these deductions, an investor could pay very little towards a property (thanks in part to an interest-only home loan) for a period, then flip the property for a profit provided there are capital gains.

Franking credits

People receiving dividends from shares might be able to reduce their taxable income by the value of franking credits attached to dividends 

Now, imagine you own a business, and that business pays tax on its profits before providing them to you. That means the money you receive from your business has already been taxed and arguably shouldn’t be taxed again. That’s the basic idea behind franking credits. 

People who buy shares in companies effectively own a portion of that company and often receive a portion of a company’s income in the form of dividends. In Australia, those dividends might also come with franking credits attached, which investors can redeem at tax time to reduce their taxable income by the value of the tax already paid by the company.

If they receive more franking credits than they are liable to pay in tax, they can (controversially) get a cash refund on the excess.

Capital gains tax discounts

Property and share owners can minimise their capital gains tax obligations when selling properties by utilising various discounts. There are ways to reduce, or even wipe out, capital gains tax when selling property or shares, such as the ‘six year rule’.

Primary places of residence aren’t subject to capital gains tax, and investment properties held longer than a year see their capital gains tax rate halved.

Those discounts and concessions are largely designed to serve an important purpose: To encourage investment.

The argument often goes, without investment in housing and industry, there would be less housing and industry. Thus, encouraging individuals to invest by offering tax concessions is theoretically a win-win for both those individuals and the nation.

When young workers pay more tax than millionaires earning $170k

Beyond arguably distorting markets (including the housing market), however, tax incentives offered to Aussies who invest in shares or property can leave those unable to join in feeling sour. 

Perhaps, it might also leave them paying more than their fair share.

Take four examples offered by Think Forward, via a partnership with social media influencer Jack Toohey: A property investor, a late career professional, a wealthy retiree, and a young worker. 

View this post on Instagram

A post shared by Jack Toohey (@jack_toohey)

It found that, of the imaginary quartet, the young worker who rents and is paying off a HECS-HELP debt paid the most tax, representing 22% of their income.

Meanwhile, the property investor makes the most of negative gearing and the late career professional minimises their tax bill by making additional super contributions.

The wealthy retiree, on the other hand, benefits from tax-free super withdrawals and franking credits, leaving them with a $100 tax bill that represents just 0.1% of their earnings. If they were to have earned their $170,000 annual income through employment, they may have paid $51,500 in tax. 

“Younger Australians could be forgiven for thinking that the tax system is biased against them” H&R Block director of tax communications Mark Chapman told Savings.com.au.

“After all, most of the significant tax breaks – such as tax breaks for investing in or withdrawing superannuation, negative gearing of rental properties, the main residence exemption from capital gains tax for their family home, and franking credits on dividends – are typically enjoyed by older, wealthier Australians.

“In fact, it gets worse even than that, with the burden of student loans on top and also rent to pay – the exact opposite situation of a wealthy 50-something who might be their landlord and is claiming tax relief on their property.”

The Grattan Institute’s 2019 Generation Gap report suggested that improving the efficiency of the taxation system would be one of the most impactful changes the government could make to improve generational inequality. 

It was also said to be the among hardest to achieve – both to implement and to sell to the public. 

But wait, weren’t we all young once?

“It’s hard to escape the fact that the better off and the older you are, the more tax advantages you’ll accrue,” Mr Chapman continued.

“Of course, the old can simply point to themselves as an example of what to do. 

“They were once struggling youngsters themselves and look at what they have achieved.

“But, in a cost of living crisis, it can feel like youngsters have no opportunity to save and invest for the future, with every cent that they earn going towards rent, petrol bills for the car, and gas and electricity bills to heat their home. 

“The average house price is far higher, relative to earnings, than it ever was in the past and with loans hard to come by and expensive, even this first step to financial independence is a step too far for many under-35s.”

If you were born in or before the early ‘80s, you were probably of working age during what might have been the most prosperous time to be in Australia in generations. 

From 2000 to 2020, excluding the blip born from the Global Financial Crisis (GFC), unemployment and inflation were steady, and interest rates (largely determined by the cash rate) were low and falling, as the below charts depict. 

All that means that, in general, there were plenty of jobs, people’s living costs were typically stable, and lower interest rates encouraged plenty of punters to load up on debt.

What did many use that debt to buy? Why, property of course, the value of which took off amid to resulting demand.

And while the GFC sent the stock market spiralling, taking years to recover fully, Australia’s near-unique franking credits system – introduced in the late ’80s – provided tax incentives for investors taking advantage of dividends.

Now, you don’t need to be a data-fiend to notice a marked trend in the above charts. 

Things changed in a big way right around the time of the pandemic.

Young Australians’ savings have been hit particularly hard by the ensuing cost-of-living crisis, as CommBank’s latest full year earnings report depicts:

Rents have soared, as have home loan interest rates (particularly impactful for those who managed to buy but who hadn’t built up substantial equity), and inflation has seen the cost of everyday items going through the roof. Not to mention, purchasing a home appears further and further out of reach, with the vast majority of first home buyers unable to save a 20% deposit.

And younger generations aren’t expecting the government to support them through their struggles.

Think Forward surveyed 1,000 young Australians and found 87% don't believe the government is doing enough to support them to achieve their goals. Additionally, 69% believe that older generations aren’t contributing their fair share.

“The perception is that our political leaders aren't listening to the concerns of young people and, in some cases, are being quite disparaging towards young people’,” Mr Walker said.

“There's a lack of recognition of the challenges that young people are facing and they’re too easily dismissed.”

Of course, that’s not to say older Aussies aren’t also financially suffering. 

Those who haven’t accumulated assets and wealth likely face many of the same financial challenges that younger Aussies do, with the added stress of retirement on the horizon. 

The latest report from the Poverty and Inequality Partnership between the Australian Council of Social Service (ACOSS) and UNSW Sydney found those aged between 15 and 24 and those aged over 65 are nearly-equally likely to be living in poverty. 

Meanwhile, around one in six people experiencing homelessness in Australia are older, the governmental specialist homelessness services annual report notes. 

Still, as a cohort, the future doesn’t look nearly as glittery to today’s Aussie youth as it likely did to their parents. 

And that’s before we consider other worrying talking points, such as the changing climate and looming energy transformation, a shifting industrial base, and continuously tense geopolitical relations, all of which are factors Federal Treasurer Jim Chalmers noted in the Intergenerational Report. 

Not to mention, the ageing population will likely see fewer taxpayers sharing the burden of public spending in the years to come.

Could stage three tax cuts provide relief from generational inequality?

In a few small ways, running a nation like Australia is similar to running a household – one that’s falling behind on its bills. 

Australia’s gross debt ballooned from around $534 billion in March 2019 to close to $895 billion as of October 2022. 

That’s forecasted to continue rising, surpassing $1 trillion in financial year 2025-26. 

At that point, gross debt will represent around 35% of Australia’s GDP. What else could soon represent more than 30% of the nation’s GDP? 

Taxation revenue.

Government revenue from taxation climbed 15% year-on-year in the 2021-22 financial year, as per the most recent data available from the Australian Bureau of Statistics (ABS), weighing in at 29.6% of GDP. 

That was largely driven by an increase in income tax, which this graph by IFM Investors chief economist Alex Joiner depicts: 

That escalated quickly... pic.twitter.com/rzrC2SFyoU

— Alex Joiner (@IFM_Economist) December 6, 2023

A separate publication, the oft-cited Intergenerational Report 2023, notes that personal income tax is tipped to rise over the coming decades.

That’s because of a phenomenon known as ‘bracket creep’ – a result of inflation, wage growth, and a stagnant taxation system.

You probably already know how Australia’s tax brackets function. But those brackets haven’t been updated for a while and the wages people receive typically rise regularly. 

Cue, many workers are now in tax brackets that simply weren’t designed for them. 

That’s where stage three tax cuts come in

The solution put into play by the Coalition and carried forward by Labor has come in three parts, with the final part set to be implemented in the middle of this year. 

The third stage will drop the 32.5 cent tax bracket to 30 cents, scrap the 37 cent tax bracket, and raise the 45 cent tax bracket threshold from $180,000 to $200,000. The resulting changes will look like this:

Image by Jeremy Bishop on Unsplash.