When it comes to tax-effective investments, it’s hard to look past super. It’s technically not an investment in itself, but instead an investment vehicle with its own specific rules. It can offer great tax advantages for the savvy investor.
Salary sacrificing payments into super (from your pre-tax pay) can offer you a good deal. Generally, any money you salary sacrifice up to the concessional contribution cap each year attracts a maximum of 15% tax. This increases to 30% for people with high levels of income over a set threshold (over $300,000 in 2016/17, with the threshold decreasing to $250,000 from 1 July 2017). Given that the maximum marginal rate is currently 49%, it can still represent a significant saving.
What’s more, if your spouse earns less than $13,800 you may also be able to claim a tax offset of up to $540, by making an after-tax contribution to their super.
Of course, the main drawback of investing in super is that you generally can’t access it until after you retire. But that can also be an advantage - its forced savings that makes sure you have a long term investment to draw on later in life.
This is a popular strategy for those wanting to invest in property, while minimising tax.
Here’s how it works: you buy an investment property with the view that the short term costs, like interest payments, maintenance, and other ongoing expenses will be less than the rental income your property earns. These ongoing expenses may entitle you to a tax deduction, which reduces the amount of income upon which tax will be payable.
Deductions may be used to reduce tax payable on other sources of income, such as salary. The theory is that even though this type of investment ‘costs you money’ over the shorter term, your property will hopefully continue to rise in value, offsetting the short term losses – and providing a capital gain over the longer term.
Remember, this strategy relies on a strong capital gain for the short-term losses to be worthwhile. You’ll also need to make sure your income and overall cash flow is at a level that will provide you with the money you need to fund the ongoing expenses shortfall.
There are often pretty significant transaction costs involved with buying and selling property (such as Stamp Duty, and real estate fees).
You should speak to a registered tax agent to understand the tax implications of this strategy in your circumstances.
Franking credits, also known as imputation credits, are a way for Australian companies to provide a credit to their shareholders for tax that has already been paid at the company level.
Franking credits can reduce the tax paid on dividends paid by Australian companies, or be received as a tax refund, depending on your marginal tax rate. Compared with securities that aren’t eligible for franking credits, like international shares, franked securities can help investors reduce the tax they pay. Some strategies purposely target these shares to take advantage of this benefit.
It’s important to consider whether this strategy is right for your individual tax circumstances and financial goals.
Talk to a professional adviser
We all like to get a good deal with our tax, and there are many strategies to help you do so. It’s easy to find investments that claim to reduce the tax you pay, but remember, they may not always be the right choice for you. To discuss a tax-effective financial plan that is based on your own circumstances and financial goals, speak to your financial adviser and registered tax agent today.