Would income splitting for tax purposes really solve the cost-of-living crisis?

Taxing households, rather than individuals, sounds great, right? This month, MP Bob Katter joined a list of politicians who have called for income splitting to reduce the household tax burden and address the rising cost of living.

Who wouldn’t want to pay less tax? But does income splitting actually mean a smaller tax bill for everyone involved?

One form of household taxation is called ‘income splitting’. This is when household income is added up and then evenly distributed across multiple taxpayers (usually a couple). This number determines the rate at which each family member is taxed, therefore reducing the total tax paid by a household. However, income splitting places a higher tax burden on secondary income earners – who we know are mostly women.

Matt Canavan is one of Australia’s main proponents of income splitting, having raised it in his maiden speech to parliament back in 2015, and again earlier this year when he became leader of the National Party. Likewise, income splitting has been adopted by One Nation as one of their key policies. Both parties have framed income splitting as a measure to help families with the cost of living and the cost of raising children.

It’s worth noting that income splitting is currently available to people who earn income from assets, including business assets, but it is not available to wage earners.

But how does income splitting actually work? Let’s take an example of a married couple, Amy and Ben:

Ben is the ‘breadwinner’, earning $130,000 p.a., and Amy has returned to work part-time after parental leave and earns $40,000.

Under our current tax system, Ben would be taxed at a rate of 24.9% and pay $32,388 in tax, and Amy would be taxed at a rate of 9.28% and pay $3,713 in tax. The total amount of tax they pay as a household is a rate of 21.23%, or $36,101.

Now, let’s look at how income splitting works.

Ben’s $130,000 plus Amy’s $40,000 is $170,000. Divide this in half, and you get $85,000 – this is the rate that each member of the household would be taxed at.

The effective tax rate on $85,000 is 11.6%. This means that Ben would pay $15,080 and Amy would pay $4,640 in tax. As a household, they pay $19,720 in tax.

You can see that whilst the household pays less tax in total, Ben has a lower tax burden, and Amy has a higher tax burden.

In this scenario, Amy pays around $930 more in tax each year, or about $18 more each week. Meanwhile, Ben’s tax bill is essentially subsidised to the tune of nearly $330 each week, and close to $17,300 over the whole year.  The tax burden for Amy has increased by 25%, and the tax burden for Ben has decreased by 49%.

Meanwhile, the Government forgoes much needed revenue that could be used to fund childcare, social housing or public health services.

Income splitting doesn’t only unfairly increase the tax burden for secondary income earners; it relies on several gendered assumptions about families and how they work. Many of these assumptions are not grounded in the reality of how families function in today’s modern economy.

Firstly, in an income splitting scenario, maximum tax savings occur when all family income is earned by the primary income earner and their spouse does not work at all. If a secondary income earner were to gain employment, move into a higher-paying job, or receive a promotion, they would have a higher tax burden, and it would increase the ‘family unit’ tax rate. Income splitting would therefore reduce incentives for women’s workforce participation and reinforce the division of unpaid labour and care work.

Secondly, income splitting relies on an assumption that resources are pooled within family units. To be fair, Australia’s income support system assumes this as well – despite evidence to the contrary, particularly for victim-survivors of domestic and family violence. Put simply, everyone has equal access to household funds.

In the 21-22 financial year, 16% of women (1.6 million) experienced partner economic abuse. Further, in Australia there are no mechanisms for enabling tax relief on the grounds of economic abuse. This means that if income splitting were to be introduced, a secondary income earner could be liable for their partner’s tax debt in cases of economic abuse.

Thirdly, income splitting reveals a gendered assumption that a ‘husband’ is the primary income earner, and a ‘wife’ is presumed not to have or need genuine financial independence. This concept relies on the ‘ideal’ or ‘nuclear’ family and does not acknowledge the reality of diverse family and kinship structures that exist within Australian society, including single people, non-heteronormative families, multi-generational families, and single-parent families.

Many European countries used to have various types of income splitting, but during the 1970s, they realised how unfair it was; it did not promote equal opportunity and was a disincentive for women’s workforce participation.

Whilst many aspects of the tax-transfer system could be improved – the unit of taxation is not one of them. Supporting families is important, but not to the detriment of women’s economic security.

Inge Hogan is a policy officer within the Economic Equality Portfolio of the Working with Women Alliance.