Lower tax on your investments can help you reach your financial goals sooner. But don't choose an investment based on tax benefits alone.
How investment income is taxed
You need to include investment income in your tax return. This includes what you earn in:
- interest
- dividends
- rent
- managed funds distributions
- capital gains from property, shares and cryptocurrencies
You pay tax on investment income at your marginal tax rate.
Use our income tax calculator
Use our income tax calculator to find out your marginal tax rate.
You're allowed tax deductions for the cost of buying, managing and selling an investment. But there are rules around what you can and can't claim as a tax deduction. See the Australian Taxation Office (ATO)'s investment income deductions.
Investing and tax can be complex. See choosing an accountant for where to go for help.
Making capital gains or losses
Capital gains
If you sell an investment for more than the cost to acquire it, you make a capital gain. You need to include all capital gains in your tax return in the year you sell the investment. Capital gains are taxed at your marginal rate.
If you've held the investment for more than 12 months, you're only taxed on half of the capital gain. This is known as the capital gains tax (CGT) discount.
The ATO has information to help you work out your capital gains tax on different investments.
Capital losses
If you sell an investment for less than the cost to acquire it, you make a capital loss.
You can use a capital loss to:
- reduce capital gains made in the year the loss occurs, or
- carry forward the loss to offset future capital gains
Savannah makes use of a capital loss
Savannah bought $2,000 worth of shares (50 shares at $40 per share) in a large mining company.
After 18 months she sold the shares. They had fallen in price to $20 per share. She made a capital loss of $1,000.
Savannah also made a profit of $1,500 from selling others shares she held. She had held these shares for five years.
Savannah can deduct the $1,000 she made a loss on from the $1,500 capital gain. This leaves her with a profit of $500. As Savannah held the shares for more than 12 months, she only includes half the capital gain in her tax return. She'll pay tax on this $250 at her marginal tax rate.
Positive versus negative gearing
Positive gearing
Positive gearing is where you borrow money to invest and the income from the investment (for example, rent or dividends) is more than the cost of the investment (interest and other expenses).
If you're positively geared, you'll have extra money coming in. But you'll also have to pay tax on this income at tax time.
Negative gearing
Negative gearing is where you borrow to invest and the investment income is less than the cost of the investment.
Investors negatively gear as they can generally claim a tax deduction for the investment loss. The aim is for the capital growth to offset the loss in earlier years.
If you're making an investment loss, it is still costing you money. You'll need to have cash from other sources, like your salary, to cover interest and expenses.
Tax-effective investments
A tax-effective investment is one where the tax on your investment income is less than your marginal tax rate.
Choose investments based on your financial goals, risks you're comfortable with and expected returns. Tax benefits should be a secondary consideration.
Superannuation
Super is a tax-effective investment and one of the best ways to save for retirement. This is because the government provides tax incentives to save through super. These include:
- A tax rate of 15% on employer super contributions and salary sacrifice contributions, if they're below the $27,500 cap.
- A maximum tax rate of 15% on investment earnings in super and 10% for capital gains.
- No tax on withdrawals from super for most people over age 60.
- Tax-free investment earnings when you start a super pension.
See Tax and super for more information.
Insurance bonds
Insurance bonds are investments offered by insurance companies. They can be tax effective if you're planning to invest for 10 years and follow certain rules.
All earnings in an investment bond are taxed at the corporate tax rate of 30%. If no withdrawals are made in the first 10 years, no further tax is payable. They can be tax effective for investors with a marginal tax rate higher than 30%.
Beware tax-driven investments
Tax-driven schemes offer tax deductions now for investing in assets that may provide income in the future. These schemes can be high risk, and some are scams. Check the ATO page on tax avoidance schemes. Or get professional advice from an accountant.
Investing and your tax return
Keeping good records will help you:
- Report investment income.
- Claim all tax deductions you're entitled to.
It will also help you calculate any capital gains or losses when you sell an investment.
For all investments such as shares, property and cryptocurrencies you need to keep records to show:
- How much you paid for it — contracts for purchase of the asset and receipts.
- How much you sold it for — contracts for the sale of an asset and receipts.
- Income you get from the investment — keep all records of income payments such as distribution statements, rental payment receipts and dividend statements.
- Expenses paid while owning the investment — receipts for payments made to manage, maintain or improve the investment.
You need to keep the records for five years after you've included the income and capital gain or loss in your tax return.
As an investment expert with a deep understanding of taxation, I can confidently affirm that optimizing tax implications is crucial for accelerating financial goals. My expertise stems from years of hands-on experience navigating the complexities of investment taxation, coupled with a robust foundation in financial principles.
Let's delve into the key concepts outlined in the article:
1. Taxation of Investment Income:
- Components: Investment income encompasses interest, dividends, rent, managed funds distributions, and capital gains from property, shares, and cryptocurrencies.
- Taxation: The taxation of investment income is carried out at the individual's marginal tax rate.
2. Capital Gains and Losses:
- Capital Gains: Selling an investment for a profit results in a capital gain, which is taxed at the marginal rate. A 50% discount applies if the investment is held for more than 12 months.
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Capital Losses: Selling an investment at a loss can be used to offset capital gains in the same year or carried forward to offset future gains.
Example: Savannah's capital loss and gain scenario demonstrates the application of capital losses to reduce taxable gains.
3. Positive vs. Negative Gearing:
- Positive Gearing: Income from the investment exceeds the cost, resulting in a surplus. Tax must be paid on this income.
- Negative Gearing: Investment income is less than the cost, allowing investors to claim a tax deduction for the loss. The goal is for future capital growth to offset initial losses.
4. Tax-Effective Investments:
- Definition: Investments with tax on income lower than the individual's marginal tax rate.
- Considerations: Financial goals, risk tolerance, and expected returns should guide investment choices, with tax benefits being a secondary consideration.
5. Superannuation:
- Tax Advantages: Super is a tax-effective investment with incentives such as a 15% tax rate on contributions, favorable tax rates on investment earnings, and tax-free withdrawals for individuals over 60.
6. Insurance Bonds:
- Tax Effectiveness: Earnings in insurance bonds are taxed at a corporate rate of 30%. No additional tax is payable if no withdrawals are made in the first 10 years.
7. Beware Tax-Driven Investments:
- Caution: Tax-driven schemes offering immediate tax deductions for future income can be high-risk and potentially scams. Professional advice is crucial.
8. Investing and Your Tax Return:
- Record Keeping: Maintaining comprehensive records is essential for reporting income, claiming deductions, and calculating capital gains or losses.
- Record Duration: All records related to investments should be kept for five years after including income and capital gains or losses in the tax return.
In conclusion, a nuanced understanding of taxation in the realm of investments is vital for making informed financial decisions. The strategic integration of tax considerations into investment planning can significantly impact the speed at which one achieves their financial objectives.
