At Investlink Group Pty Ltd, it is important to help our clients understand the different tax rates payable depending on which structure investments are made under:
- Personal income is taxed at marginal tax rate (MTR). The higher the income, the higher the average rate of tax. Capital gains on assets of more than 12 months are treated with a 50% discount on the gain and taxed at your marginal tax rate.
- Corporations in Australia pay a flat rate of tax on income at 28.5%. No discounting available to capital gains.
- Superannuation funds pay a tax rate of 15% on income and 10% on long term capital gains. It is also important to note that contributions into superannuation as employer contributions and/or salary sacrifice contributions (concessional contributions) are taxed at 15%. Upon reaching preservation age, the funds in your superannuation can be transferred into a pension account where both income and capital gains are taxed at a rate of 0% rate.
In our view tax planning should only ever be considered with a view to increasing wealth. Sadly, many investors get into tax schemes that help in obtaining tax deductions, but make errors with investment decisions. When a client receives a tax deduction for an investment, you obtain a tax benefit equal to the amount of tax you would have paid on the income at your marginal tax rate.
It is also advisable to move income between tax years. For example if you are currently working now but likely not be working in a few years from now, then you may be in a lower tax rate by then. It might be sensible to defer the sale of an asset until the lower income tax rate is applicable, to avoid paying too much capital gains tax.
There are a number of tax-effective financial planning strategies that you may be able to put in place before the 30th June to enhance your tax and wealth position, however early planning is essential.
Some of the strategies may include:
- Possibly claiming a tax deduction for contributing into spouse or spouse contribution
- Transition to retirement planning – over preservation age and still working
- Claiming a tax deduction on income protection premiums
- Making a tax deductible charitable donation
- Expecting a capital gains – what are the strategies to consider?