An investment is tax effective if you pay less tax than an investment with the same risk and expected return. Lower tax can help your savings grow faster, but remember not to invest based on tax benefits alone.

Whether you’re starting out and wanting to make smart investment choices for your portfolio or you’ve been investing for some time and looking at new ways to make your tax more effective on existing assets, this guide will help give steer you in the right direction.

Read on for guidance on what makes some investments more tax effective…

  1. Don’t be discouraged by marginal tax
  2. Make the most of your super
  3. Managing tax on shares and property
  4. Investment bonds
  5. Be wary of ‘tax-driven’ schemes
  6. Protect your investments

Don’t be discouraged by marginal tax

It’s important to know firstly how much you will be paying if you happen to earn additional income outside of your registered tax bracket. Check the table below so you are aware.

Current Resident Tax Rates 2017 – 2018

Taxable income Tax on this income
$0 – $18,200 Nil
$18,201– $37,000 19c for each $1 over $18,200
$37,001 – $87,000 $3,572 plus 32.5c for each $1 over $37,000
$87,001 – $180,000 $19,822 plus 37c for each $1 over $87,000
$180,001 and over $54,232 plus 45c for every $1 over $180,000

*These rates do not include the Medicare levy (usually 2%) or the Medicare levy surcharge (1%-1.5% for high income earners). For more information see ATO: Medicare levy. Temporary budget repair levy is included in the top marginal tax rate.

If you do happen to exceed the threshold it could be an idea to invest your additional income elsewhere such as in super contributions to be more tax effective.

For example; If you earn $65,000 annually, you will pay marginal tax of 32.5c for every additional dollar you earn. If you put your money in superannuation, you will pay at most 15% tax on investment earnings, which is less than the marginal tax.


Superannuation (it could be more super)

A simple way of being tax effective with your super is to take advantage of the government incentives to save and make voluntary superannuation contributions in addition to compulsory contributions from your employer. The benefits to this are

  • Super is ts taxed at 15% maximum (10% for capital gains)
  • You can claim tax on super if you are self-employed (up to certain limits)
  • If you are over 60, you pay no tax on money you take out of super, in most cases
  • Investment earnings are tax free for a super pension


Managing tax on shares and property

Income received from shares and property will usually be taxed at your marginal tax rate.

A capital gain is the profit mad from selling an investment for more than what you paid. This is commonly seen when buying and selling large assets like property. Capital gains are usually taxed at a lower rate than personal income. There are several options you can take to make property tax-effective, such as; transfer of the asset to a taxpayer with a lower applicable tax rate, or borrowing against assets.

Franked dividends (profits paid to shareholders that the company has already paid tax on) will receive a credit for the 30% tax already paid. Meaning a $7 franked dividend is worth the same as a $10 unfranked dividend. This becomes tax effective from the reduction the company has already paid.


Investment Bonds

Purchasing investment bonds through insurance companies or societies can be a tax effective long term investment, particularly if your marginal tax rate is more than 30%. Earnings on investment bonds are taxed at the corporate rate of 30% and if no withdraws are made in the first 10 years, no further tax is payable. You also have the option to make contributions to investment bonds, subject to limitations.

Be wary of tax driven schemes

A tax scheme usually allows you to postpone your tax and pay at a later date. This frees up your tax dollars for investment in shares or asset now, which may turn a profit in the future.

Be warned, tax schemes are high-risk investments. Make sure you gain trusted tax advice from a professional and ensure they are not profiting from referrals and commissions, which may skew their recommendation.

Are your investments protected?

Finally, make sure your investments are protected. There are many different approaches and this will differ for each person and business depending on their unique situation and requirements. Below are just a few strategies you might want to put in place. Make sure you consult expert advice to make sure you have the best asset protection in place.

  • Diversification
  • Principal protection
  • Stop losses, to protect against falling share prices

Have questions about creating a tax effective asset portfolio? Get in touch with our tax and accounting experts.