How investment income is taxed

Posted on 11 November 2021
How investment income is taxed

Moneysmart
(ASIC)

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 investigate before you invest for how to spot a dodgy tax scheme. Or get professional advice from an accountant.

 

Investing and your tax return

Keeping good records will help you at tax time to:

  • 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’ll need to keep records for five years after you included the income and capital gain or loss in your tax return.

Posted in:News  

Maximising your retirement savings: 6 Tips

Posted on 28 October 2021
Maximising your retirement savings: 6 Tips

Money and Life
(Financial Planning Association of Australia)

You might think there’s not much you can do to increase the value of your superannuation in retirement. But with Australians now spending close to 30-years in retirement on average[1], our super needs to last longer than ever.

As a consequence, the federal government has proposed some changes to superannuation that will make it easier than ever to grow your balance following retirement. Here’s a look at some of the strategies you can use to maximise your super savings.

  1. Leave funds invested longer

If you’re a retiree and your superannuation took a hit during to the COVID-19 pandemic, there is good news. Markets largely recovered recently and the federal government has extended the superannuation minimum drawdown rate for a further 12-months.

That means eligible retirees drawing certain superannuation pensions and annuities have until 30 June 2022 before they’re forced to withdraw the full pre-COVID-19 amount.

If you have sufficient cash flow to get by, it’s worth taking advantage of the reduced minimum drawdown and leaving your assets invested until they return to pre-COVID-19 levels.

  1. Adding to your super

Think you can’t add to your super after you retire? That’s not strictly true. If you’re aged 67 to 74 years old, you can make personal contributions, spouse contributions or salary sacrifice contributions to your super provided you meet the work test. That means you must have worked at least 40 hours over 30 consecutive days in a financial year.

Importantly, the federal government has proposed removing the work test altogether from 1 July 2022. That would allow individuals aged 67 to 74 to make or receive non consessional (after tax) contributions or salary sacrified contributions, subject to the existing contribution caps.

  1. Downsizer contribution

If you’re aged 65 years or over (and meet all the eligibility requirements) you can make a one-off contribution of up to $300,000 to your super from the proceeds of selling your home. If you’re part of a couple, each spouse may be able to contribute up to $300,000 each.

The federal government has also proposed reducing the age for making a downsizer contribution to 60 years.

It’s important to note that selling your main residence can affect your eligibility for income entitlements such as the Age Pension. So it’s best to seek professional financial advice if you’re considering making a downsizer contribution to your superannuation.

  1. Accessing government benefits

If you’re eligible for government benefits like the age pension, carer’s allowance or a disability support pension, this can really help your retirement income stretch further. It’s worth investigating your eligibility when you’re planning your retirement, as government payments are subject to income and asset tests.

  1. Eliminate debt

Nothing chews up your income stream as fast as debt repayments, so aim to clear any outstanding debts before you enter retirement. By starting your retirement debt free, you’ll be able to use your retirement income for things that really matter, like living expenses, health, leisure and travel. If you’re already retired and you’re still carrying debt, such as a mortgage or credit card, speak to a financial planner and put a plan in place to become debt free.

Read more: Smart strategies for paying down debt

  1. The right investment strategy

Finally, while it’s important to protect your super balance once you’re retired, it’s probable that you’ll still need to earn investment income for some time. It’s worth considering how long your superannuation needs to last when planning your investment strategy.

Everyone’s circumstances are different, and the right strategy for you will depend on things like your total super balance, your tolerance to risk and how you plan to fund your retirement. Always seek professional financial advice before making any changes to your super investments.

Related: The superannuation health check

If you’re looking for other ways to grow your retirement income, speak with a financial planning professional. They can give you tailored individual advice to help you achieve financial freedom in retirement.

Posted in:News  

‘Sophistication’ warning for Aust economy

Posted on 21 October 2021
‘Sophistication’ warning for Aust economy

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

Prior to the global coronavirus pandemic, Australia enjoyed 28 years of uninterrupted economic expansion.

However, a report warns the nation has become complacent and is not guaranteed the same sort of success over the next 50 years as it faces highly complex challenges coming out of the pandemic.

The report by consultants Deloitte says it will be more important than ever for Australia’s policy makers and business leaders to understand the structural changes underway and how they can effectively compete in a more complex and fragmented world.

“Out of uncertainty and volatility, we have the opportunity to shape a new future for Australia,” Deloitte Australia CEO Adam Powick said.

Central to Deloitte’s report is its new economic sophistication index that ranks countries based on their value add to goods and services they produce and how well their industries are connected in global supply chains.

Germany tops the rankings, followed by Great Britain, but Australia stands at a mediocre 37th.

“It’s a shock to realise we aren’t doing as well as we think we are,” head of Deloitte Access Economics Pradeep Phillip said.

“With half a century of hindsight, it’s little surprise that we have an economy characterised by low manufacturing capabilities and missed opportunities from not commercialising our strong research.”

He said Australia hadn’t built the business or structural foundations required for a diversified, resilient economy.

“Instead, we’ve been complacent with our success, and our lower value add and weaker connectedness with the global economy compared to our high-income peers is a serious issue for our future prosperity,” Dr Phillip said.

He says this will leave Australia vulnerable should geopoliticial tensions with China worsen or meaningful action on climate change catches Australia’s off-guard.

“If Australia’s action on climate change continues to lag and, in response, overseas governments introduce limits on our high emission intensity production flows, this too would be devastating for the Australian economy,” Dr Phillip said.

“The world would no longer want what we have, and our Index ranking would drop.”

AUSTRALIA NEEDS TO BE MORE SOPHISTICATED: DELOITTE

* Feeding the world – demand for Australian food is strong, but the core industries involved in Australian food production are among the least sophisticated

* Decarbonising the world – with competitive advantage in natural resources, technologies and energy, Australia can take part in the move to global decarbonisation, by producing new sustainable energy

* Shaping the future of health – Australia can create new value by using technology to turn its world-class health research into implementable health and wellbeing solutions

* Looking to the sky – Australia has a strong track record in the areas it has chosen to play in space, but also needs to grow its capabilities from niche research and manufacturing to end-to-end products and services

* Manufacturing the future – Australia should have a clear focus on moving up the value chain by connecting advanced manufacturing into areas of greatest economic opportunity

* Satisfying the senses – Australian organisations need to continue to be responsive and innovative by co-designing products and services for the ever-changing demands of consumers

* Servicing the world’s businesses – using virtual and digital technology, a significant opportunity exists to export business-to-business services such as engineering, telecommunications, professional services, and financial and insurance services.

Posted in:News  

Treasurer sees case for RBA review

Posted on 14 October 2021
Treasurer sees case for RBA review

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

Treasurer Josh Frydenberg believes there is a case to review the operations of the independent Reserve Bank of Australia.

Last month the Organisation for Economic Cooperation and Development said there should be a review into the RBA’s monetary policy framework, noting underlying inflation has undershot its two to three per cent target band since 2015.

The RBA does not expect inflation to be sustainably within the target before 2024.

Economists like Westpac’s Bill Evans also thinks the two to three per cent inflation target has been set too high for too long when other major central banks target two per cent.

“I think there is a case there for having a review. It has been a number of years since they have had a review into their operation,” Mr Frydenberg said in an online address to the Citi Australia and New Zealand investment conference on Wednesday.

“That is something that I am certainly open to and I’ll continue to talk to the Treasury and the RBA about a timetable.”

Labor has backed an RBA review for some time, believing it could be to its benefit.

“I don’t think this is about beating up on the institution, but about making it better in the interest of all Australians,” shadow assistant minister for treasury Andrew Leigh said in a recent interview.

Dr Leigh said the RBA is less transparent than some of its peers, noting that it doesn’t hold press conferences when it announces its policy decisions and doesn’t produce the minutes of the meeting showing the voting decisions that members make.

“(It) has a board which is largely made up of talented generalists rather than monetary policy experts,” he said.

“I think, given what we’ve seen in the inflation performance over recent years, it is appropriate to have a look at that.”

Posted in:News  

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