Tax Aware Investing

The two vehicles for reducing the tax you pay on investment returns both force you to make a trade-off, accessibility for preferential tax treatment.

The first, superannuation in accumulation phase, gives you a 15% tax rate on earnings and a 10% tax rate on realised capital gains. However, you must meet a condition of release to access these funds, the most common being reaching the age of 60 and retiring or reaching 65.

The second, the lesser-known investment bond, gives you a flat tax rate on earnings of 30%, however the withdrawal from the bond is capital gains tax free provided you leave your money in the bond for 10 years or more.

What kind of difference does this make to investment returns? Let’s compare to investing in your personal name in the 39% and 47% tax brackets.  

To keep things as simple as possible I will assume that each time, we are investing in a term deposit paying 5% interest. No capital gains, no franking credits, just a very simple example.  

If you invest $10,000.00 at 5% for 10 years, before any taxes you would have $16,289. If you are in the 47% tax bracket you would have $12,989. If you are in the 39% tax bracket you would have $13,505. If you invest in an investment bond at 30% you would have $14,106 and if you invested in superannuation you would have $15,162. 

Marginal Tax Rate 47% = 47.5% of the pre-tax return 

Marginal Tax Rate 39% = 55.7% of the pre-tax return 

Investment Bond rate 30% = 65.3% of pre-tax return 

Superannuation rate 15% = 82.1% of pre-tax return 

As you can see, taxes can make a huge difference to your after-tax returns and structuring your investments is a crucial stage in the financial planning process. 

If you would like assistance with your financial affairs please reach out to Evolution Financial Planning today.