Investment tax strategies

Minimising the tax you pay on investments is all about good planning
 
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  • Updated:3 Feb 2006
 

01.Introduction

Investment-tax-strategies

Tax is a healthy by-product of successful investing and generating a tax bill from your investments means you’re also generating income or capital gains. But if you’re sick of seeing half your profits disappear as tax at the end of the financial year, there are strategies you can use to ensure you don’t pay more than you need to.

  • How can I minimise the amount of tax I pay?
  • What are the most tax-effective ways to invest my money?
  • Should I pay off my home loan or top up my super?
  • Should I make extra contributions to my super before or after tax?

Please note: this information was current as of February 2006 but is still a useful guide to today's market.


It is possible to plan your investment strategy to reduce tax, without taking too much risk. If you’re close to retirement, using a combination of salary sacrifice and undeducted contributions to boost your super can save you thousands of dollars in taxation. New super arrangements provide increased opportunities and improved flexibility for your final years in the workforce.

Younger investors still needn’t look much further than making extra mortgage repayments as a tax-effective way to start investing.

Ways to invest a spare $10,000 in pre-tax income (for an individual on $60,000 pa, 30% marginal rate)

Investment method Undeducted contributions to super Salary sacrifice to super Invested in mortgage ($300,000 loan over 25 years @ 7%) Invest in a term deposit Invest in shares paying fully franked dividends
Tax on income $3000 $1500 $3000 $3000 $3000
After-tax money available to invest $7000 $8500 $7000 $7000 $7000
Earnings rate (a) 7.5% (3-year average for default investment options — net taxes, fees and charges) 7.5% (3-year average for default investment options net taxes and fees) 7% 6% (b) 6.2% capital growth, 4.3% pa income (5 year average from ASX 200)
Earnings in first year $525 $638 Saving of $490 in interest in first year (c) $432 $434 growth in value of shares, $301 paid in dividends, with attached imputation credit of $129
Tax on earnings (d) (d) No tax payable $129 $65 on cap gain (assuming they are sold after 12 months) & $0 payable on income from dividends (e)
After-tax position after 1 year $7525 $9138 (f) $7490 (c) $7303 $7670

Table notes

(a) Returns are based on typical recent performance, and future performance may differ.
(b) Interest paid monthly.
(c) An extra $7000 invested, every year (after 5 years) for the remaining loan term, would shorten a mortgage by around 10 years and save around $150,000 in interest (not allowing for fees).
(d) Tax at 15% is already included in crediting rate and assumes growth within fund is realised.
(e) Growth taxed on 50% of capital gain at 30%, dividends received ‘tax paid’ at 30%.
(f) You may have to pay tax if you take your super as a lump sum or exceed tax-free thresholds and RBLs.

More information
The information in this article is intended to provide you with general information about tax strategies. For more specific answers and questions, the ATO website at www.ato.gov.au has information on all tax topics.

Other bodies that might be able to help include: ASIC www.asic.gov.au ; the National Information Centre on Retirement Investments (NICRI) www.nicri.org.au.

Obtain specific tax advice from your accountant.

 
 

 

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