Tax-effective investing, sized to what you actually earn.
Tax-effective investing in Australia usually gets sold to people one product at a time — a trust here, a geared property there. Any of them can work. They only earn their keep when they are sized against the whole picture: what you earn, what you owe, what is left in your super cap, who else is in the family, and how long you plan to hold on.
Work out the plan first, then the structure.
Tax-effective investing isn't a product you buy. It is what happens when the right thing is owned in the right way, for someone on your tax rate, over the length of time you plan to hold it. Do it in the wrong order and the structure costs you more than it ever saves.
For households on a good income the order is usually: fill up the super cap first (there is more on that on the superannuation advice page), look at salary sacrifice and insurance you can claim, and only then start looking at structures outside super if there is still money left over. The financial planning page sets out how it all joins up.
Six ways to do it, and when each works.
None of these is a pitch. Each suits a particular income, tax rate and cash-flow situation. If one doesn't suit yours, we'll say so.
Franking credits
Australian shares pay dividends with the company tax already paid on them. If your own tax rate is low enough, you get that tax back as a refund.
Negative gearing
Borrowing to invest, where the interest costs more than the income comes in, and you claim the difference. Works best on a high tax rate over a long stretch. It is not a substitute for the thing actually going up in value.
Salary sacrifice into super
Money from your pay going into super before tax, taxed at 15% instead of your normal rate. For most employees it is the cheapest tax break going. There is a yearly cap.
Family trust
Income shared out among adult family members who pay less tax than you do. Suits business owners and investments alike. Someone has to make and record those decisions properly every year.
Investment bonds
The tax is paid inside the bond at the company rate, and after ten years you can take the money out with no further tax. Handy for school fees and for people on the top rate.
Your own super fund
Lets you hold property and things a normal fund won't touch, with more say over your pension. It costs more to run, and the legal duties on you as trustee are not a formality.
The trap: chasing the tax break and forgetting the investment.
The most expensive mistakes we see were all tax-deductible. A geared property bought for the deduction, then sat on through a flat decade. A family trust set up for flexibility that spends years handing out losses. The tax tail ends up wagging the investment dog.
We do it the other way round: work out whether the investment is any good, then decide how to own it. If the thing won't grow or pay you an income on its own merits, no clever structure will save it. If owning property inside super suits you, the same adviser writes the super fund advice and the loan. If you're borrowing to invest outside super, you can size the repayments with the investment loan calculator.
- Your tax rate now
- Your likely rate when you sell
- Income or growth, and how much of each
- What the rest of the family pays
- How long you will hold it
- Who you want it to go to
Questions we get a lot.
If your tax rate is high and the property has a real shot at growing, negative gearing brings the cost of holding it down. But the tax break is only part of the picture. If the property doesn't grow, you're just losing money slowly with a discount on it.
Sometimes. A trust costs money to run and someone has to make and document the decisions every year. It tends to suit business owners, and families with adult kids who pay less tax than the parents. We work out whether the saving actually beats the cost of running it — often it doesn't.
Both get taxed much like ordinary shares — on the income and on the gain when you sell. The real question is whether they suit how much risk you can stomach and what else you already own, not whether they happen to be popular this year.
This sits right on the line between financial advice and tax. We work alongside your accountant rather than trying to replace them. If you haven't got one, we can point you at a few we deal with regularly.
Keep reading
- Financial planning overviewThe main page — what a plan covers and how it's written.
- Superannuation adviceSalary sacrifice, and the cheapest tax break going.
- Debt managementWhich debts you can claim, and which to pay off first.
- SMSF advice and lendingWhen running your own fund is worth the cost.
- Retirement planningWhere franking credits and tax-free pensions fit in.
Information on this page is general in nature. It does not take into account your personal objectives, financial situation, or needs. Read the relevant Product Disclosure Statement and consider whether personal advice is appropriate before acting on any information here.
Get the way you own things checked.
The first conversation is free and you're not committing to anything. Bring last year's tax return and we'll work out where the structure is earning its keep and where it isn't.