THE MEASUREMENT OF INCOME IN THE ABS SURVEY OF INCOME AND HOUSING
The Survey of Income and Housing (SIH) collects detailed income information from each household member (15 years and over) through personal interview. Household income consists of all current receipts, whether monetary or in kind, that are received by the household or by individual members of the household, and which are available for, or intended to support, current consumption.
Income includes receipts from:
- employee income (whether from an employer or own incorporated enterprise), including wages and salaries and other receipts from employment, income provided as part of salary sacrifice and/or salary package arrangements, and non-cash benefits provided by employers;
- profit/loss from own unincorporated business (including partnerships);
- net investment income (interest, rent, dividends, royalties);
- government pensions and allowances (includes pensions and allowances from Commonwealth and State and Territory governments as well as pensions from overseas); and
- private transfers (e.g. superannuation, workers' compensation, income from annuities, child support, and financial support received from family members not living in the same household).
Household income excludes receipts from:
- capital transfers such as inheritance, lump-sum retirement benefits, life insurance claims (except annuities), compensation (except for foregone earnings), loan repayments;
- certain current transfers offset against expenditures (for example, lottery and other gambling winnings, non-life insurance claims);
- receipts that result from a reduction in net worth (for example, sale of assets, withdrawals from savings, and loans obtained); and
- holding gains/losses resulting from changes in the value of financial and non-financial assets and liabilities (for example, the value of shares held).
The various components of income are included below in 'Components of income'.
More information on the conceptual definition of household 'income' can be found in the publication Standards for Income Variables, June 2015
(cat. no. 1287.0).
PRIVATE, GROSS, DISPOSABLE AND FINAL INCOME
Private income comprises all current income receipts excluding government pensions and allowances.
Some measures of private income include net imputed rent for owner occupied dwellings and subsidised private rentals. In output from the SIH, these are labelled as 'private income (including imputed rent)'. For more information see the 'Imputed rent' section of this publication.
The treatment of overseas pensions varies. Where 'private income' and 'government pensions and allowances' are presented the overseas pensions are included in 'government pensions and allowances'. In comparison, where 'private income (including imputed rent)' and 'social assistance benefits in cash' are presented the overseas pensions are included in the 'private income (including imputed rent)'. This is because 'social assistance benefits in cash' refers only to Australian government pensions and allowances.
Gross income is the sum of the income from all sources before income tax and the Medicare levy have been deducted. Prior to 2005–06, Family Tax Benefit (FTB) was paid through the tax system or as a lump sum and was excluded from gross income for practical reasons. Since 2005–06 these payments have been included in gross income.
Disposable income is the income available to a person or household after income tax, Medicare levy and Medicare levy surcharge (if applicable) have been deducted. Disposable income better represents the economic resources available to meet the needs of households than gross income. The Medicare levy surcharge has been calculated and deducted from gross income in the calculation of disposable income since the 2007–08 cycle of SIH.
Income tax is estimated for all households using taxation criteria for 2013–14 and the income and other characteristics of household members reported in the survey.
Prior to 2005–06, the derivation of disposable income also included the addition of FTB paid through the tax system or as a lump sum by Centrelink since, for practical reasons, it was not included in the gross income estimates.
Note that while child support and other transfers from other households are included in the income of the households receiving the transfers, they are not deducted from the incomes of the households making the transfers in deriving disposable income.
Social transfers in kind
Social transfers in kind (STIK) consist of goods and services provided free or at subsidised prices by the government. In output from the SIH, these are restricted to those arising from the provision of education, health, housing, social security and welfare, and electricity concessions and rebates. STIK includes reimbursements of approved expenditures such as the Medicare rebate, the Private Health Insurance Rebate, the Child Care Benefit and the Child Care Rebate. The cost of administering the provision of social assistance benefits in cash is included. For more information see the 'Social transfers in kind' section of this publication.
Final income is the most extensive concept of household income produced by the ABS. Final income is equal to household disposable income plus social transfers in kind, less taxes on production (such as the GST, duties on imports, and fuel and tobacco excise). Final income can only be calculated using data from the Household Expenditure Survey (HES) as taxes on production are estimated for individual households based on their purchase of goods and services. The HES is conducted every six years for a sub-sample of SIH households.
Final income shows the full effect of taxation (income taxes and taxes on production) and government expenditure (cash payments and in kind transfers) on the distribution of income among private households in Australia.
More detail on the components of final income are included in the publication Government Benefits, Taxes and Household Income, Australia, 2009–10
(cat. no. 6537.0).
Diagram 1 INCOME CONCEPTS AND COMPONENTS
CURRENT, ANNUAL AND WEEKLY INCOME
Current and annual income
Current income is the income received by respondents at the time when survey information is collected from them. This is the main measure of income included in published output from the SIH.
and recipients of government pensions and allowances such as Centrelink payments, current income is generally based on their most recent payment, as long as it is their usual payment. Additional questions are used to obtain information about receipts which may not have been included in the most recent payment. For employees, information is collected on irregular overtime, bonuses and non-cash benefits. For recipients of government pensions and allowances, information is collected on reductions to payments due to lump sum advances, and less frequent payments such as the Schoolkids Bonus and the Carer Supplement.
Annual income provides a somewhat longer term perspective of income, providing data about income obtained from all sources over the whole year. It has the advantage of being less sensitive to short term variations in income, such as a person having little or no current income during a short period of unemployment and for which they have adequate resources from past employment to avoid economic hardship. However, annual income has the potential to be limited in its relevance to the current situation of respondents, especially when analysing the combined income of a household which gained or lost adult members during the course of the year. There are also practical difficulties in collecting annual income, for example where respondents have had short periods of time in different jobs, or have received Centrelink payments for short periods of time, they may not accurately recall each of these sources of income.
Income is collected using a number of different reporting periods, such as the whole financial year for own unincorporated business
and investment income, and the usual payment for a period close to the time of interview for wages and salaries, other sources of private income and government pensions and allowances. The
income is divided by the number of weeks in the reporting period to derive weekly income. Estimates of weekly income from the SIH do not therefore refer to a specific week within the reference period of the survey.
EQUIVALISED DISPOSABLE HOUSEHOLD INCOME (EDHI)
A major determinant of economic wellbeing for most people is the level of income that they and other family members in the same household receive. While income is usually received by individuals, it is usually shared between partners in a couple relationship and with dependent children. To a lesser extent, it may be shared with other children, other relatives and possibly other people living in the same household, for example, through the provision of free or cheap accommodation. This is likely to be the case for
children other than dependents and other relatives with low levels of income of their own. Even when there is no transfer of income between members of a household, nor provision of free or cheap accommodation, members are still likely to benefit from the economies of scale that arise from the sharing of dwellings. Therefore household income measures are often used for the analysis of people's economic wellbeing.
Larger households usually require a greater level of income to maintain the same material standard of living as smaller households, and the needs of adults are usually greater than the needs of children. The income estimates are therefore adjusted by equivalence factors to standardise them for variations in household size and composition, while taking into account the economies of scale that arise from the sharing of dwellings. The resultant estimates are known as equivalised disposable household income (EDHI). EDHI is calculated by adjusting disposable income by the application of an equivalence scale. This adjustment reflects the requirement for a larger household to have a higher level of income to achieve the same standard of living as a smaller household. Where disposable income is negative, it is set to zero EDHI.
When household income is adjusted according to an equivalence scale, the EDHI can be viewed as an indicator of the economic resources available to a standardised household. For a lone person household, it is equal to income received. For a household comprising more than one person, EDHI is an indicator of the household income that would be required by a lone person household in order to enjoy the same level of economic wellbeing as the household in question.
The concept of EDHI is applicable to both households and the people living in those households. That is, each person in a household has the same level of EDHI as the household itself. The difference between using households or persons as the unit of analysis is discussed in the 'Housing' section of this publication.
Published SIH output includes estimates of EDHI but not estimates of 'Equivalised gross household income', although the latter can also be produced.
Table 1 shows that a couple household with one child would need $1,800 weekly disposable income to have the same equivalised disposable household income as a lone person household with a disposable income of $1,000.
|TABLE 1 EXAMPLES OF EQUIVALISED INCOME|
Equivalising factor (x)
Disposable income (y)
Equivalised disposable income (y/x)
(1 + 0.5) = 1.5
|Couple with one child under 15 years |
(1 + 0.5 + 0.3) = 1.8
|Group household with three adults |
(1 + 0.5 + 0.5) = 2.0
|Equivalence scales are mainly used for household income, but can also be used for household wealth.|
COMPONENTS OF INCOME
Income in the SIH is collected in separate components. This section of the publication explains the definitions used for each of those components, and also describes some components of income that are not included in the aggregate income measures included in SIH publications. Data for some of the excluded components are available from the surveys. Each of the detailed income data items and the aggregate measures of income are included in the data item list, available from the 'Downloads' tab of this publication.
The ABS revised its standards for household income statistics following the adoption of new international standards in 2004 and a review of aspects of the collection and dissemination of income data. Income estimates from 2007–08 applied the new income standards which are reflected in the following definitions of the components of income.
More details on the nature and impact of the change in income measures are available in Appendix 4 'Improvements to income statistics' in the Information Paper: Survey of Income and Housing, User Guide, Australia 2007–08 (cat. no. 6553.0).
Employee income is collected in the SIH from each person aged 15 years and over who worked for an employer or in his/her own limited liability business. It comprises all payments received by individuals as a result of their current or former involvement in paid employment.
The aggregate current income estimates produced from the SIH include the usual pay that respondents received in the most recent pay period. They include wages and salaries, amounts salary sacrificed, tips, commissions, piecework payments, penalty payments and shift allowances, remuneration for time not worked (e.g. sick and holiday pay) and workers' compensation paid through the payroll. In addition, other components such as non-cash benefits, bonuses, termination payments and payments for irregular overtime worked are all included.
The aggregate annual income estimates produced from the SIH include total income from all jobs in the financial year prior to the survey.
Own unincorporated business income
Own unincorporated business income is collected from all persons aged 15 years and over who are working as owners or partners in unincorporated enterprises. Own business income is the share of the profit/loss of the enterprise accruing to the person. Profit/loss consists of the value of the gross output of the enterprise after the deduction of operating expenses and an allowance for depreciation of assets used in producing the output. Losses occur when operating expenses and depreciation are greater than gross receipts and are treated as negative incomes.
Since profit or loss calculations are often only made by businesses on a quarterly or annual basis, it is not possible to collect data on current income in the same way as can be done for employee income or current cash transfer income. Instead, survey respondents are requested to provide an estimate of their own business income they expect to receive in the current financial year. Responses are likely to be less accurate when collected early in the year and more accurate when collected later in the year, and there is some likelihood that responses will be too optimistic or too pessimistic, resulting in some bias in the aggregate estimate. However, this methodology gives better results than the methodology used in surveys up to and including 2002–03 that simply extrapolated reported own business income from the previous financial year onto the current period. Under the previous methodology, estimates could also have a strong downwards bias - particularly for new businesses - but could also be significantly upwardly biased if the current business circumstances had turned down from the previous year.
Investment income includes interest and dividend income received as a result of the ownership of financial assets such as bank accounts and shares, and rent and royalty income received from the ownership of non-financial assets. The 2013–14 SIH also includes income from offset accounts, which is an estimate of the amount households saved in interest on their loans, as a component of income.
The rent component of investment income is measured on a net basis, that is, gross rent less operating expenses and depreciation allowances. Interest paid on money borrowed to purchase shares or units in trusts is also deducted from income earned from these sources giving a net income earned from such investments. All other components, for which associated expenses are normally relatively small, are on a gross basis.
Rent comprises receipts from residential properties, other than owner-occupied dwellings, and from non-residential properties. Operating expenses deducted from gross rent include a range of dwelling related expenses such as repairs and maintenance expenses, rates and interest payments. If the operating expenses plus depreciation allowances are greater than the gross rent, net rental income is negative.
Current investment income is collected by asking survey respondents for an estimate of their total expected income in the financial year, as described above for own unincorporated business income.
Government pensions and allowances
Government pensions and allowances are cash transfer payments made by government entities to persons under social security and related government programs. They are primarily paid by Centrelink or the Department of Veterans' Affairs, and include pensions paid to aged persons, benefits paid to veterans and their survivors, study allowances for students, Family Tax Benefit (FTB), etc.
Some government payments are excluded from income as they are considered to be either a reimbursement of expenditure or a capital transfer. In deciding whether a government payment should be included in income, the intent of the government payment is considered. Government payments considered to be reimbursements of expenditure, including the Medicare rebate, Child Care Rebate (CCR) and Child Care Benefit (CCB), are not included as income; they are instead included as social transfers in kind (for more information see the 'Social Transfers in Kind' section of this publication). Payments considered to be capital transfers are also not included as income. Examples of capital transfers include the First Home Owner Grants Scheme, as it is designed to help first home buyers purchase their own home, and the aged persons' savings bonus and self-funded retirees' supplementary bonus (paid as part of the introduction of The New Tax System in 2000–01) as they were designed to help retired people maintain the value of their savings and investments following the introduction of the GST.
The Baby Bonus (formerly known as the Maternity Payment) introduced in July 2004, is included as income, recognising that the intention of the payment is to offset some of the extra consumption costs incurred with the birth of a child. Similarly, Child Disability Assistance Payment paid to recipients of Carer Allowance, is also included as part of income. The Baby Bonus was replaced from 1 March 2014 with the Newborn Supplement and Newborn Upfront Payment, and paid as part of Family Tax Benefit Part A for children who were born, taken into care for at least 13 weeks, or placed for adoption after 1 March 2014.
Paid Parental Leave, introduced on 1 January 2011, is also included as income as per the Baby Bonus. Under the Paid Parental Leave scheme, eligible working parents can get government funded pay when they take time off from work to care for a newborn or recently adopted child. The income test for paid parental leave requires that the parent or parents earn no more than $150,000 in the year previous to the child's birth. People who meet the eligibility requirements must decide which payment, paid parental leave or Baby Bonus, is best suited to them, as both payments cannot be received for the same child.
Dad and Partner Pay is a new entitlement under the Paid Parental Leave Scheme paid directly to a working dad or partner who cares for a child born or adopted from 1 January 2013. Dad and Partner Pay gives you up to two weeks of government-funded pay at the rate of the National Minimum Wage. The Dad and Partner Pay can be taken all at once at any time in the first year after birth or adoption.
The Clean Energy Advance, now known as the Energy Supplement, paid from March 2013 and January 2014 is included in income from government pensions or allowances. This tax-exempt, indexed payment was paid to pensioners, other income support recipients, families receiving Family Tax Benefit payments and Seniors Supplement recipients, provided they meet eligibility requirements.
Also included in income from government pensions and allowances is the biannual Schoolkids bonus payment that is being paid to eligible families, carers and students from January 2013 to the end of 2016. This biannual payment, paid in January and July, was made payable to families receiving Family Tax Benefit Part A, plus young people in school receiving Youth Allowance and other income support and veterans' payments, providing they met the age and education requirements.
Values of FTB paid as a lump sum and one-off payments regarded as income are annualised, that is, treated as though they were paid evenly through the year. Therefore the amount included in current weekly income is the total payment for the year divided by 52.14, the average number of weeks in a year. The payments are assigned to all respondents who would have met the eligibility criteria at the time that they were interviewed, even if the payments were only announced after the interview took place. If an annualised approach was not taken, a few respondents receiving the benefit would include a large amount in the current income, and most people eligible for the benefit would not include any payment because it was not received in the fortnight before the interview.
All pensions received from overseas are included under government pensions and allowances.
Other income includes non-government pensions such as superannuation and life insurance pensions, regular annuity benefits, private scholarships or study allowances, workers’ compensation not paid through the payroll, child support payments (non-government), income from accident/sickness insurance, and other current transfers received from family members living in other households, such as parental allowances paid to students living away from home.
Note that, while child support and financial support received from other family members not living in the same household are included in the income of the households receiving the transfers, they are not deducted from the disposable income of the households making the transfers.
Workers' compensation payments are made to injured employees to compensate for foregone earnings and to meet ongoing medical costs. While regular workers' compensation receipts have been included in previously published results, lump sum receipts were not. Commencing in the 2007–08 SIH, both forms of workers' compensation are included in the published estimates.
A cut-off has been applied to significant lump sum amounts, where it was considered likely that part of the receipt would be saved to meet future expenses, rather than to support current consumption. Two methods were applied in determining the cut-off limit. For respondents who reported some employee income, the cut-off was applied at the equivalent of three months pay, based on the greater of the respondent's reported employee income and average weekly earnings. For those reporting no employee income, the cut-off was applied at the equivalent of 52 weeks average weekly earnings.
Most severance, termination and redundancy payments and payments for unused leave are relatively small amounts, but some very large amounts were reported in 2013–14. These were treated in the same manner as the reported large amounts in each cycle from 2007–08 SIH, that is, an adjustment was applied on the basis of the current weekly income that would have been earned over a three-month period which was calculated to be the average time of unemployment between jobs. Amendments were made to both current financial year and previous financial year data if required.
Income tax and Medicare levy
In 2013–14, estimates of income tax, the Medicare levy and the Medicare levy surcharge relate to the liability associated with the income being reported by respondents, regardless of when it is actually paid. In other words, an accrual rather than cash-based concept is used.
Income tax is modelled for all households using the relevant taxation criteria and the income and other characteristics of household members reported in the survey.
LOW AND LOWER INCOME HOUSEHOLDS
The economic wellbeing of households with very low incomes is of particular interest to social policy researchers and analysts. In outputs from the 2013–14 SIH, a new definition of 'Low income' and 'Lower income' households has been adopted.
Low income households
Analysis of 'Low income' households is presented in Household Income and Wealth, Australia, 2013–14 (cat. no. 6523.0).
'Low income' definition (new in 2013–14 SIH)
The new definition of 'Low income' households are those with incomes in the 3rd to 20th percentiles of equivalised disposable household income, that is, the lowest income quintile excluding the bottom two percentiles. Estimates for this population in the relevant data cubes are labelled 'Adjusted lowest income quintile'.
The time series data presented from 1994–95 to 2013–14 in the publication Household Income and Wealth, Australia, 2013–14 (cat. no. 6523.0) has been updated to reflect the new definition.
'Low income' definition (previous)
Prior to the 2013–14 SIH, 'Low income' households were defined as those in the second and third deciles of equivalised disposable household income, that is, it excluded all households in the lowest income decile. Estimates for this population in the relevant data cubes in survey outputs up to 2011–12 SIH are labelled 'Second and third deciles'.
Lower income households
Analysis of 'Lower income' households is presented in the publication Housing Occupancy and Costs, Australia (cat. no. 4130.0).
'Lower income' definition (new in 2013–14 SIH)
The new definition of 'Lower income' households are those with incomes in the 3rd to 40th percentiles of equivalised disposable household income, that is, the lowest two income quintiles excluding the bottom two percentiles. This new definition therefore covers 38% of the total population.
'Lower income' definition (previous)
Prior to the 2013–14 SIH, 'Lower income' households were defined as those with equivalised disposable household income between the 10th and 40th percentiles, that is, it excluded all households in the lowest income decile. This old definition therefore covered 30% of the total population.
Why change the definitions?
Households at the lowest end of the income distribution have, on average, expenditures higher than households with low levels of income, and have higher average net worth. For this reason, the lowest income decile was previously excluded from analysis of 'low' and 'lower' income populations. However, households with zero or negative income, or income below government pension rates, make up almost one half of the lowest income decile. Many people in the lowest income decile are therefore likely to be experiencing economic hardship.
Further investigation of the characteristics of people in the lowest income decile using data from the 2011–12 SIH, found that excluding people from the bottom two percentiles of the income distribution, rather than the entire first decile, captured more households who would be expected to be at high risk of experiencing economic hardship. Government pensions and allowances were the main source of income for 60% of households in the 3rd EDHI percentile, compared with 18% and 43% of the 1st and 2nd percentiles, respectively. Mean net worth of households in the 1st and 2nd EDHI percentiles was also substantially higher than the average for each of the percentiles from 3rd to 40th. Graphs 1 and 2 show the distribution of main source of income and net worth for the lowest 40 EDHI percentiles. Estimates in these graphs have been smoothed to enhance readability.
Source(s): Household Income and Wealth, Australia, 2013-14 (cat. no. 6523.0)
Source(s): Household Income and Wealth, Australia, 2013-14 (cat. no. 6523.0)
LOW ECONOMIC RESOURCE HOUSEHOLDS
There are many factors that influence whether people are experiencing economic hardship. People living in households with low economic resources, i.e. low income and low wealth, are considered most at risk of experiencing economic hardship, particularly if their income falls or they have substantial unexpected expenses.
The ABS has developed a low economic resource (LER) measure that includes people who are simultaneously in the lowest four deciles of both equivalised disposable household income (including private imputed rent) and equivalised household net worth. It therefore excludes people with either relatively high incomes or relatively high wealth.
The LER measure classifies around 20% of people in low income, low wealth households, although the actual proportion will vary over time as the joint distribution of income and wealth changes. It does not identify whether these people are actually experiencing economic hardship.
One of the strengths of this measure is its ability to contrast the characteristics of the LER population with those in the low income and low wealth quintiles.
DIAGRAM 2: LOW ECONOMIC RESOURCE HOUSEHOLDS
Further analysis of low economic resource households is available in the Household Economic Wellbeing 'Fact sheet 3. Low economic resource households' and the feature article 'Low Economic Resource Households' in the publication Household Income and Income Distribution, Australia, 2011–12 (cat. no. 6523.0). The 2013–14 SIH LER data will be released with the imputed rent estimates available in late 2015.