Investment Update – November 2023 Finance Focus – April 2024

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Bracket Creep

This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 29 July 2017.

We recently became the proud owners of three kittens. It was one of those situations where the kittens needed a new home as a matter of life or death, so they ended up with us. The kids, of course, are thrilled with the new family members and now spend their days hunting them down and trying to force them to fall asleep on their laps. The kittens, being a little wild, respond with scratches and bites, a tactic which has little effect on the overly-affectionate children. Not wanting to spend an hour de-furring myself prior to work each day, I gave strict instructions that the kittens were to be restricted to the boot room, where all the mess could be easily contained. At least, that was the plan. By day three they had extended their territory to the kitchen, by day four they were making themselves comfortable on the lounge sofa and by the end of the first week I was having to move the kittens off my pillow when I went to bed.

If the kittens were a military operation, it would have been called mission creep. If they had been a software project, it would have been called feature creep and if they were a tax, it would have been called bracket creep. Which is a nice little segue into a quick discussion of bracket creep, which of course is little more than a tax hike by stealth. Governments know that income tax revenue can be counted on to increase over time as workers’ wages simply keep pace with inflation. Left unchecked, eventually the entire populace ends up on the highest marginal tax rate – a disincentive to hard work if there was ever one. That said, making investment decisions solely on the basis of the tax outcome should also be avoided. Aggressive tax minimisation schemes, such as the plantation schemes of last decade, often resulted in people spending $1.50 in order to save $1.00. That is not a strategy which leads to wealth creation. Too often however, we see people making an investment decision based on a desire to pay less tax. There is of course, one foolproof method to paying less tax: make less money! Or even worse, lose all your money. Making sound investment decisions should be your first priority; the tax implications are an important, but secondary consideration.

Naturally, not every decision needs to make sound financial sense. Adopting three kittens comes with paying for three sets of vaccinations and three visits to the vet to prevent our three kittens becoming thirty kittens. Perhaps becoming a veterinarian would have been the soundest financial decision of all.