It’s human nature to assume our own experiences are typical. When it comes to money, looks or brains, most of us think we’re average – or a perhaps a little above average but not too much. We’re still, you know, normal.
Often our self-perceptions and misperceptions do no harm at all. But when it comes to a debate about public policy and tax reform, it’s important we all agree where the middle is.
When Labor released its dividend imputation policy recently, debate raged about whether it was affecting the well off or catching ordinary people in the net. Each case study was grist to the mill for both supporters and critics of the proposal.
We saw the same pattern with the release of Labor’s negative gearing policy before the 2016 election. Or, on the other side of the political fence, with analysis of the Coalition government’s superannuation reforms or changes to age pension eligibility.
But you don’t have to wonder how you – or any random case study – compare with the rest of Australia in the wealth stakes. We can look at the data.
Let’s start with income, then look at assets.
First, a note about averages. You were probably taught about the mean, median and mode in early high school. The most common is the “mean” –the sum of all the items divided by the number of items. It’s not always useful because it’s easily distorted by outliers. If Andrew earns $50,000, Bob $70,000, Jenny $100,000 and Laura $1 million, the average/mean income of the group is $305,000. But not a single person in our example earns anything like that.
If you’re trying to describe what’s typical, it’s better to take the median. In this example with an even number of people, it’s $85,000, being the mean of the two middle numbers. The median doesn’t ignore Laura, but it’s much more representative of the group as a whole.
So how do you rank?
Well, the median gross household income was $1616 a week for 2015-2016, the most recent figures available from the Australian Bureau of Statistics. That equates to $84,032 a year.
But of course, households come in different shapes and sizes, so the ABS calculates the “equivalised disposable income” – the household income after tax, but adjusted for the size of the household. The median is $853 a week, or $44,356 a year.
Economist Matt Cowgill has used this data for a great interactive visualisation on his website, showing the distribution of Australians from no income to high income. A calculator lets you plug in your annual household income after tax and the number of adults and children in your house to find out where you sit and how many Australians are better or worse off than you. (The site crashed due to high traffic; if this happens to you, try the cached version).
Middle income could broadly be defined as the middle 40 per cent – the 20 per cent above and below the median. For a couple with no children, middle income is anywhere between $50,000 and $90,000 a year after tax.
Politicians fudge the figures when they refer to “low income earners” when they really mean people with a low taxable income. It’s quite different.
For example, income from superannuation in pension mode is tax-free. Since July 2017 you can have up to $1.6 million a person in pension mode, with anything more taxed at the still-concessional rate of 15 per cent. That still means a couple can have $3.2 million in super and, assuming a conservative return of 5 per cent a year, they’d have $160,000 a year tax-free to live on. A low taxable income? Sure. But they’re still better off than 90 per cent of Australians.
Of course, income only tells part of the story. If we’re measuring wealth, we need to take assets into account. Some assets earn an income – such as savings in a superannuation account, a share portfolio, or a rental property.
Other assets have the potential to earn an income. For example, if someone has a beach house for friends and family, they could make the house available for holiday lettings. If that person is facing the potential loss of imputation refunds under Labor’s dividend tax proposal, then problem solved – they can use the franking credits to offset the taxable income from the holiday tenants.
Assets can also reduce your living expenses – if you own a house or car outright, for example. A couple on $80,000 who owns their home outright is better off than a couple on $100,000 paying $25,000-$35,000 a year in rent or mortgage payments.
The cost of housing is the main expense for most households, according to the ABS. It’s not easy to figure out the distribution of income factoring in housing costs, but the median household net worth (the value of assets minus liabilities) is $527,000. And almost three out of four households have debt, while more than one in four have debt three or more times income.
It’s natural for someone to become wealthier over a lifetime, assuming they progress through a career and spend and invest wisely. We shouldn’t begrudge that success – but we should expect them to shoulder their share of the tax burden.
Caitlin Fitzsimmons is the Money editor for the Herald and The Age. Ross Gittins is on leave.