Make tax work for you
Be tax savvy
Consider the tax implications of any investment. An investment
is 'tax-effective' if you end up paying less tax than you would
have paid on another investment with the same return and risk.
While lower tax can help your savings grow faster, you should never
base an investment decision on tax benefits alone.
Here's some guidance about what makes some investments more
tax-effective than others.
Know your marginal tax rate
The first step in understanding how tax affects you is to know
what 'marginal tax bracket' you are in. This simply means 'If I
earn an extra dollar, how much extra tax will I pay?' The
following table will help you work out how much tax you
are paying and what your marginal tax rate is, or you can use
our income tax calculator.
Find out your marginal tax rate.
Income tax calculator
Marginal tax rate for regular income (2015-16 rates)
||Marginal tax on income in this bracket*
||19c for each $1 over $18,200
||$3,572 plus 32.5c for each $1 over $37,000
||$17,547 plus 37c for each $1 over $87,000
|$180,001 and over
||$54,547 plus 47c for each $1 over $180,000 (includes the
Temporary Budget Repair Levy)
Joe reduces his tax through super
Let's take Joe for example, who earns $50,000 per year. That
means he will pay marginal tax of 32.5c (or 32.5%) for every extra
dollar he earns, as his income falls in the $37,001 to
$87,000 tax bracket.
If you can invest so the tax you pay on your investment
returns is less than your marginal tax rate, then you are
ahead. For example, if Joe puts money in superannuation, he pays at
most 15% tax on investment earnings. This is less than his marginal
tax rate, so super is 'tax effective' for him.
Find out what income is taxable.
Shares and property
Income you receive from investing in shares and property (dividends or rent) will generally be
taxed at your marginal tax rate.
'Franked' dividends are dividends paid by an
Australian company out of profits it has already paid tax on. You
will get a credit for the 30% company tax already paid, called an
'imputation credit' or 'franking credit'. This means that a $7
franked dividend is worth the same as a $10 unfranked dividend.
Franked dividends are 'tax effective' investments because
the tax you pay on them is reduced by the amount of tax the company
has already paid. If your marginal tax rate is less than 30% you
can have the excess franking credits refunded to you. For more
about franked dividends, see dividends.
A capital gain is the profit you make when you sell an
investment for more than what you paid for it. Capital gains are
generally taxed at a lower rate than other personal income, see managing gains and losses for more
The Government gives incentives through the tax system to
encourage people to save for retirement including:
- Investment earnings in super are taxed at a maximum of 15%
(10% for capital gains)
- Super contributions, both employer and salary sacrificed contributions (up
to the contribution caps) are only taxed at 15%
- If you are self-employed, you can claim tax deductions for
super contributions (up to certain limits)
- Most people over 60 pay no tax on the money they take out of
- When you start a super pension, investment earnings are
See tax and
super for more information.
Managing gains and
When you make a profit from selling your investments you are
likely to have to pay capital gains
tax. The Australian Taxation Office has useful information to
help you work out your capital gains.
A capital gain is added to your income in the year you sell the
investment and taxed at your marginal rate. If you held the
investment for more than a year you are only taxed on
half the capital gain. So if your marginal tax
rate is 37%, your capital gains are effectively only taxed at
Keep a record of any losses you make as they can be used to
offset any gains. Capital losses can be carried forward for use in
later years. All you need to do is make a record of them in your
tax return. When you make a capital gain in future years, you can
deduct your loss from the gain.
Case study: Tom makes use of a capital loss
Tom made a capital loss when he sold
his shares in a big mining company. He bought $1000 worth when they
were $40 per share and sold them for $30 per share. So he made a
loss of $250.
Tom also made a profit of $400 from selling some shares he held
in a phone company. Tom can deduct the $250 he lost from the $400
he gained. This leaves him with a total profit of $150. As Tom had
held the shares for more than 12 months, he will only pay tax on
half the profit. A capital gain of $75 will be added to Tom's
Investment bonds (also known as insurance bonds) are investments
offered by insurance companies and friendly socieities that can be
a tax effective way to invest for the long-term if
certain rules are followed.
All earnings in an investment bond are taxed at the
corporate tax rate of 30%. If no withdrawals are made in the first
10 years of holding the bond, no further tax is payable, so they
can be tax effective for investors with a marginal tax rate higher
Contributions can also be made to investment bonds, however
there are limits on the amount you can contribute and still receive
beneficial tax treatment.
See investment and insurance
bonds for more information.
Watch out for 'tax-driven'
Tax schemes generally let you postpone your tax, but you'll
still have to pay tax in the end. They offer tax deductions now for
investing in assets that may produce an income in the future.
A worthwhile strategy needs to be a sound investment first. Any
tax benefit should be secondary.
Agricultural schemes, for example, can take up to 20 years
to earn any income (see agribusiness schemes). Look
for a clear ruling from the ATO on the tax deductions
available for individual schemes.
If you are being advised to invest in a tax scheme, check it's
not because your adviser will be earning substantially more
commission than if they recommended another investment such as a
managed fund. Many schemes designed to minimise tax are high-risk
investments. The investment should fit within your investment
plan and risk profile.
For more details see the ATO's Investigate
before you invest.
Some types of investments are more tax effective
than others. Shares with franked dividends can help you at tax
time. Super also has tax advantages. Managing capital gains and
losses needs to be a part of your overall investment plan.
Last updated: 18 Oct 2017