6523.0 - Household Income and Income Distribution, Australia, 2005-06  
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APPENDIX 2 CURRENT AND ANNUAL INCOME


INTRODUCTION

The Survey of Income and Housing (SIH) produces estimates of 'current' income and estimates of full year, or annual, income with respect to the 'previous financial year'. The tables in the main body of this publication refer to 'current' income, that is, estimates of income being received at the time the data were collected from respondents. Current income provides the most up to date information available and in some cases the most accurate information available. But it also has some disadvantages. This appendix discusses the differences in 'current' and 'annual' income measures and presents comparative estimates on both bases.


Table A3 in this appendix compares current gross income with previous financial year gross income for common reference years. For example, the previous financial year income for reference year 1995-96 is compiled from data collected in the 1996-97 SIH, whereas the current income for reference year 1995-96 is compiled from data collected in the 1995-96 SIH.



WAGE AND SALARY INCOME

For wage and salary income, Table A3 in this appendix shows that, for each reference year, aggregate income collected on a previous financial year basis was greater than aggregate income collected on a current basis.


Current wage and salary income relates to usual income from the last payment received by the respondent. The reference period for any individual respondent is likely to be the previous week, fortnight or month, depending on the length of the pay period for the job(s) in which the respondent is employed. The length of the reference period is collected in the survey so that the value can be scaled to a common basis such as dollars per week (as presented in tables in the main body of this publication) or dollars per year (as presented in Table A3 in this appendix).


If current wage or salary income contains a payment for irregular overtime worked in the previous pay period, or a pay bonus that occurs infrequently during the year, the irregular components are excluded. If such payments were included in a weekly or fortnightly pay period estimate, the recipient could appear to be receiving substantially more income annually than is likely to be the case and analysis of the respondent's economic wellbeing would be distorted accordingly.


Excluding the extra payments from current income, on practical grounds of measurement, ignores income that does make a contribution to the economic wellbeing of the recipient. To be able to accommodate the extra payments in a current income measure would require the collection of additional information about payments over a number of pay periods and their nature, so that a reasonable estimate might be made of 'current' income including an appropriate share of irregular payments. This is difficult to achieve in a household interview. By taking wage and salary income for the full preceding financial year and retaining irregular components received during the course of the year, wage and salary data in SIH are collected on the broader basis.



GOVERNMENT PENSIONS AND ALLOWANCES

Current government pensions and allowances also relate to income from the last payment received. Benefits are normally received fortnightly. As with wages and salaries, there are some benefit components, such as quarterly telephone allowance, that are not likely to be included in estimates of current income. They are not as significant a part of total government pensions and allowances as are the irregular components of wage and salary income. Therefore estimates of current government pensions and allowances could be expected to align more closely with previous financial year estimates.


In practice, estimates of government pensions and allowances reported on a previous financial year basis were lower than estimates of government pensions and allowances reported as current income, as can be seen in Table A3 in this appendix. The major cause of the difference appears to be higher underreporting of income received some time earlier compared to underreporting of income currently received.


In cases where it appears likely that an individual SIH respondent has failed to report previous financial year benefits, previous year benefit income is imputed. For example, where a respondent has reported receiving a current benefit such as age pension, is of an age that would qualify for the age pension in the previous year, and that person has not reported receiving significant income from other sources in the previous financial year, it can be assumed that they probably would have also received the age pension in the previous financial year. In such cases, previous financial year age pension has been imputed on the basis of the amount reported as current income, adjusting for benefit rate changes over the previous 12 months.


However, imputation for previous year benefit income, based on likely ongoing entitlement, is not possible for benefits such as Newstart or youth allowance, and Table A3 in this appendix indicates that, in aggregate, previous financial year income falls short of current income after the implementation of the imputation procedure described in the previous paragraph.



OWN UNINCORPORATED BUSINESS INCOME

Estimates of current income from own unincorporated business are quite different in nature to the estimates of current income for the two income sources discussed above.


The concept of business income is a net concept. It is the profit or loss derived by deducting operating expenses (including depreciation) from the value of gross output. In the past, many unincorporated businesses did not calculate profit and loss data more than once a year, and for many businesses there are revenues earned or costs incurred only infrequently during the year. Hence, in earlier surveys, SIH respondents were not asked to provide a value of current business income distinct from the value of business income received in the previous financial year.


Up to and including the 2002-03 SIH cycle, for respondents who had been in business in the previous financial year and who were currently still in business, their current own unincorporated business income was estimated to be the same amount as the previous year income (including if it was a loss), or scaled up to a full year basis if the business only operated for part of the previous year. It was implicitly assumed that any business only commencing operations in the current year would have zero income.


Since the 2003-04 SIH, respondents who currently operated an unincorporated business have been asked to estimate their income from the business for the full current financial year. In many cases, respondents could refer to the Business Activity Statements prepared for the Australian Taxation Office to help them provide an estimate. Even where this was not possible, especially for those respondents interviewed early in the financial year, the respondents are likely to be able to provide a more reasonable estimate than that generated by the methodology used in previous cycles. Under the previous methodology, estimates could 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. There is also some likelihood that respondent estimates under the new methodology may be either optimistic or pessimistic and the estimates may have some bias. The new methodology has particularly resulted in far fewer households being recorded with current business incomes that are negative, zero or only slightly positive.



INVESTMENT INCOME

Investment income includes interest and dividend income received as a result of the ownership of financial assets, and rent and royalty income received from the ownership of non-financial assets. The rent component of investment income is measured on a net basis, that is, gross rent less operating expenses. The other components, for which associated expenses are normally relatively small, are on a gross basis. In earlier surveys, estimates of current income for dividends from own incorporated business were estimated in the same way as described above for income from own unincorporated business. For other forms of investment, current income was derived by simply assuming that current income was equal to previous financial year income.


As for own unincorporated business income, since the 2003-04 SIH, respondents are asked to provide an estimate of their expected investment income in the current financial year.



OTHER INCOME

The remaining income sources include superannuation, child support, workers' compensation and scholarships. These are collected both on a current basis and on a previous financial year basis.



COMPARISON OF ESTIMATES

There are two major advantages of the current income estimates compared to previous financial year income estimates. First, they are more up to date. From 2003-04, this applies to all forms of income. For previous surveys, this applies for wages and salaries, for government pensions and allowances and for 'other' income (as defined in the preceding paragraph), which together accounted for 88% of total current income in 2002-03. Second, they appear to be more accurately reported for government pensions and allowances, and may also be more accurately reported for those elements of wages and salaries that are included in current income and for 'other' income.


On the other hand, the previous financial year estimates have the major conceptual advantage of being annual estimates with more complete coverage of income components. They have a longer time perspective, which while allowing short-term fluctuations in income to have an influence, do not allow short-term situations to potentially dominate the measure being compiled. If a short-term fluctuation has an undue influence on a current income measure, the measure is not a good indicator of underlying economic wellbeing.


The previous financial year income estimates also have the attraction of being internally consistent with respect to the time periods to which the underlying income data relate. Prior to 2003-04, the total current income estimates were compiled from a mix of data collected on a current basis and on a previous financial year basis. This short-coming was addressed in 2003-04, and subsequent years, with the current income estimates for business and investment income being the respondents' estimates of income for the full current financial year.


When analysing previous financial year data, it should be noted that the composition of the household, employment status of members of the household, etc., all relate to the current period. If the composition of the household has changed, previous financial year household income estimates relate to a quasi household. In many cases this will not have a marked effect on the data. If, for example, an additional adult joined the household, their previous financial year income will be included in total 'household' income for the previous financial year, but their presence will be reflected in the household composition data that are used for calculating the equivalising factor for that previous year, muting the impact of the artificially inflated previous year income for the household.


However, the impact of household composition changing between the previous and current years can be more marked. For example, a household may have had an additional member in the previous year and that person may have provided the bulk of the income for the household. But since SIH can only include the previous financial year income of the household members remaining at the time of interview, the household may incorrectly appear to have had very low income in the previous year, perhaps well below the levels which would have entitled members to social security benefits.


Similarly, prior to the 2003-04 SIH, previous financial year data were not collected for respondents who had only arrived in Australia in the current financial year. Therefore any previous financial year income they received while overseas did not contribute to the previous financial year income compiled for the household for 2001-02 and earlier years. But their presence is reflected in the equivalising factor applied to the income of the rest of the household, resulting in an underestimate of equivalised income of the household. While it is possible to omit such households from income distribution calculations, that has not been done for the tables included in this appendix.


Table A4 in this appendix provides income distribution indicators compiled from previous financial year data. It provides alternative estimates to the current income estimates provided in Table 1 in the main body of this publication.


Comparisons can be made between the two tables for the reference periods 1994-95 to 2002-2003, and a summary is given in Table A2 below.

A2. Selected income distribution indicators, Equivalised disposable household income

Current income basis
Previous financial year basis


1994-95
2002-03
% change
1994-95
2002-03
% change
Difference
in % change

Mean income per week, in 2005-06 dollars
Low income(a) $
260
292
12.2
264
296
12.0
-0.2
High income(b) $
910
1 056
16.0
926
1 089
17.6
1.6
Income shares
Low income(a) %
10.8
10.6
-2.2
10.7
10.5
-2.4
-0.3
High income(b) %
37.8
38.3
1.2
37.6
38.5
2.3
1.1
Percentile ratios
P90/P10 ratio
3.78
4.00
5.9
3.90
4.03
3.5
-2.4
P80/P20 ratio
2.56
2.63
3.1
2.62
2.64
0.7
-2.4
Gini coefficient no.
0.302
0.309
2.3
0.302
0.313
3.5
1.3

(a) Persons in the 2nd and 3rd income deciles after being ranked by their equivalised disposable household income
(b) Persons in the top income quintile (9th and 10th deciles) after being ranked by their equivalised disposable household income


The previous financial year estimates show stronger growth in real incomes between 1994-95 and 2002-03 for the high income group, compared with current income estimates. The previous financial year estimates show a greater decline in the income share of the low income group and a greater increase in the income share of the high income group, resulting in greater growth in the Gini coefficient. For these indicators, the previous financial year estimates show a greater increase in income inequality than the current income estimates. However, the previous financial year estimates give a smaller increase in the P90/P10 and P80/P20 ratios, indicating a smaller increase in income inequality than shown by the current income estimates.

A3. Current and previous financial year gross income(a)

1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
$b
$b
$b
$b
$b
$b
$b
$b
$b
$b
$b
$b
$b

Wages and salaries
Current income
na
194.7
199.3
211.6
223.6
na
251.1
268.3
na
308.4
(b)330.1
na
387.1
Previous financial year income(c)
194.7
204.4
219.1
232.2
na
257.7
277.0
na
311.2
327.1
na
377.4
na
Government pensions and allowances
Current income
na
34.3
36.5
38.6
39.0
na
41.2
46.5
na
49.6
56.3
na
62.0
Previous financial year income(c)
30.7
32.8
34.9
36.2
na
37.7
40.5
na
44.6
48.3
na
52.0
na
Own unincorporated business income
Current income
na
18.8
23.2
21.4
23.6
na
28.7
27.7
na
33.2
31.2
na
39.4
Previous financial year income(c)
18.5
22.8
22.5
24.4
na
27.5
25.9
na
31.3
28.0
na
35.8
na
Investment income
Current income
na
10.7
10.9
14.4
13.2
na
17.3
16.3
na
16.2
22.5
na
31.0
Previous financial year income(c)
10.9
11.0
14.3
13.0
na
17.3
15.7
na
16.6
19.8
na
27.9
na
Other income
Current income
na
7.2
7.9
8.2
9.9
na
10.5
11.7
na
15.1
17.7
na
19.7
Previous financial year income(c)
6.6
7.0
7.5
8.4
na
8.5
9.7
na
13.1
16.5
na
17.8
na
Total income
Current income
na
265.8
277.8
294.3
309.3
na
348.9
370.5
na
422.5
(b)457.8
na
539.2
Previous financial year income(c)
261.4
278.0
298.4
314.2
na
348.7
368.8
na
416.9
439.8
na
510.8
na

na not available
(a) Historic data in the table are not adjusted for changes in the Consumer Price Index
(b) Estimates for 2003-04 have been revised to include salary sacrificed income not already included in wages and salaries
(c) Compiled from the Survey of Income and Housing (SIH) of the year following the reference year. There was no SIH conducted in 1998-99, 2001-02 or 2004-05

A4. Income distribution indicators, Previous financial year income(a)

Person weighted indicator
1993-94
1994-95
1995-96
1996-97
1998-99
1999-2000
2001-02
2002-03
2004-05

Mean income per week(b)
Lowest quintile $
182
191
197
198
201
206
204
210
218
Second quintile $
314
318
321
319
340
344
358
360
384
Third quintile $
439
437
443
447
479
481
499
502
537
Fourth quintile $
586
588
591
604
641
644
670
666
708
Highest quintile $
916
926
941
966
1 031
1 052
1 070
1 089
1 202
All persons $
488
492
499
507
538
545
560
565
610
Second and third deciles $
259
264
268
266
280
285
292
296
312
Income per week at top of selected percentiles(b)
10th (P10) $
210
214
219
220
227
231
232
237
247
20th (P20) $
256
263
269
266
277
285
289
294
310
30th (P30) $
314
317
320
318
339
341
356
357
381
40th (P40) $
374
374
379
377
405
407
429
432
459
50th (P50) $
440
436
442
447
478
481
497
501
537
60th (P60) $
504
506
507
517
556
557
576
575
615
70th (P70) $
577
583
589
600
637
640
668
661
704
80th (P80) $
686
688
684
698
744
752
780
777
827
90th (P90) $
839
836
836
856
908
937
948
957
1 022
Income share
Lowest quintile %
7.5
7.8
7.9
7.8
7.5
7.5
7.3
7.4
7.2
Second quintile %
12.9
12.9
12.9
12.6
12.6
12.6
12.8
12.7
12.6
Third quintile %
18.0
17.8
17.8
17.6
17.8
17.6
17.8
17.8
17.6
Fourth quintile %
24.0
23.9
23.7
23.8
23.8
23.6
23.9
23.5
23.2
Highest quintile %
37.6
37.6
37.8
38.2
38.3
38.6
38.2
38.5
39.4
All persons %
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Second and third deciles %
10.6
10.7
10.8
10.5
10.4
10.5
10.4
10.5
10.2
Ratio of incomes at top of selected income percentiles
P90/P10 ratio
4.00
3.90
3.82
3.89
4.00
4.06
4.08
4.03
4.13
P80/P20 ratio
2.68
2.62
2.54
2.62
2.68
2.64
2.70
2.64
2.67
P80/P50 ratio
1.56
1.58
1.55
1.56
1.56
1.56
1.57
1.55
1.54
P20/P50 ratio
0.58
0.60
0.61
0.60
0.58
0.59
0.58
0.59
0.58
Gini coefficient no.
0.304
0.302
0.302
0.308
0.312
0.313
0.312
0.313
0.324

(a) Compiled from data collected in the Survey of Income and Housing of the year following the reference years. Income is equivalised disposable household income
(b) In 2005-06 dollars, adjusted using changes in the Consumer Price Index