Tax rules don’t treat all income equally
Have you ever completed your own tax return?
If so, you know that the tax office treats different types of income differently. Bank interest is recorded in one place, dividends from shares in another, and managed fund distributions in yet another.
And unless you are taking a pension or lump sum from your super, you can skip your earnings on those funds entirely.
Returns from investing in shares and property, in particular, come with some real tax benefits.
The trick is to make sure you take advantage of them.
Understand the tax rules
The most common tax benefits are:
- Franked dividends from Australian shares. These represent a tax credit of up to 30% for tax already paid by the company. If your franking credit entitlement is over $5,000, be aware that the shares must have been held for at least 45 days.
- A 50% discount on the capital gain made from the sale of a personally held asset. Superannuation funds can qualify for a one-third discount. Note that this only applies where the asset has been held for at least 12 months.
- Capital losses can be offset against capital gains and the net gain is only payable when the asset is sold. The tax can be deferred for a long time.
Choose who owns the investment assets
Achieve the best tax outcome with a low-income earner holding investment assets.
- earn up to $20,542 tax-free
- receive a refund of all imputation credits
- and pay less tax on capital gains.
For example, if an investor on the top marginal tax rate of 47% had a $100,000 capital gain, they would pay $23,500 in tax and Medicare.
If an investor with no other income had a $100,000 capital gain they would pay $8,797 – a savings of $14,703.
Choose the structure of your superannuation
The most generous tax arrangements are Superannuation funds. If you manage a share portfolio in a super fund, capital gains will be taxed at 10% or 15%. By contract, if you held them privately, they would be taxed as much as 23.5% or 47%.
Imputation credits are especially valuable in a super fund because the fund pays a flat 15% tax and the 30% tax credit can be used to offset tax on other income.
Be smart about timing to maximise tax benefits
To maximise tax benefits, the 45-day and 12-month rules are obviously important. Capital gains are only incurred when an asset is sold and capital gains tax (CGT) can be deferred indefinitely. An investment asset can be passed through your estate to future generations and no CGT would be payable.
Superannuation provides special opportunities to avoid CGT altogether. The Superannuation fund pays tax at 15% in the accumulation stage. But once a pension is started, the fund pays no tax at all. A share portfolio or a property can be sold once the pension has started and no CGT would be payable.
The opportunity to invest tax-effectively using some of these methods will vary from one person to the next. Make sure you seek advice about how they relate to your own situation. Talk to a Think Big Financial Group investment and tax specialist, phone (03) 9676 9879.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs. Speak with a tax accounting specialist (such as TBFG) who is up-to-date with applicable deductions, tax law, and business structuring to get you the biggest return on your EOFY tax assessment.