Investments & Taxes - What You Need to Know

Before you make any investment it’s important to keep in mind the potential tax implications. 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.

Shares and Property
The 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, as, if the asset has been held for more than 12 months, a 50% capital gains discount will apply (in most cases).

Managing Gains and Losses
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 18.5%.

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.

If you have any questions around this week’s content, please don’t hesitate to contact us. We’re only a phone call or email away.