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 for your ordinary income.
This simply means 'If I earn an extra dollar, how much extra tax
will I pay?' Use the income tax calculator
to work out how much tax you are paying, or see the
following table to find out your marginal tax rate.
Marginal tax rate for regular income (2012-13 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 $80,000
|$180,001 and over
||$54,547 plus 45c for each $1 over $180,000
*These rates do not include the Medicare levy (usually 1.5%) or
the Medicare levy surcharge (1%-1.5%). For more information see ATO: Medicare levy.
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 over $37,000.
If you can invest in a way that means you pay less tax on your
investment returns 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
'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. If
your marginal tax rate is less than 30%, shares that pay franked
dividends can be 'tax effective' investments. 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' below.
The government gives incentives through the tax system to
encourage people to save for retirement including:
- Investment earnings are taxed at a maximum of 15% (10% for
- Super contributions made by salary
sacrifice (up to the contribution caps) reduce your income
- 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 superannuation and
retirement for more about superannuation.
Managing gains and
When you make a profit from selling your investments you are
likely to owe capital gains tax. The Australian
Taxation Office (ATO) provides 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 hold the
investment for over 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
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
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 as long as 5 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 also fit within your investment
plan and risk profile.
For more details see the ATO's Investigating
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: 20 Aug 2013
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