Of all an investor’s total expenses, taxes have the potential to take the biggest slice of the investor’s income, so it is important to have tax effective investments. The tax amount depends on the type of fund whether it is a pension, a super or a unit trust. The tax amount also depends on the type of assets you have, the marginal tax rate and the investment strategy of the fund manager.
You can keep more of your investment income if you use tax-efficient investments, organise your assets into the right accounts as well as other tax saving strategies. To calculate your taxes accurately, you must keep all related documents so that you and your accountant can review them and accurately calculate how much tax you have to pay.
One tax-efficient strategy for investments is buying and holding. Selling shares or a managed fund and holding on to it for less than a year means you pay capital gains tax on a regular rate. However, owning these assets for more than a year will give you a capital gains tax discount of 50%.
You may also use tax-efficient funds like index funds that have a low turnover for they buy and sell securities relatively infrequently. This can also lessen your liability on capital gains and improve your returns.
Of all asset classes, Australian shares have the lowest tax rate because of the dividend imputation system. Some share funds search for companies with high levels of franking to help them offset the tax they incur on dividends.
Another tax-efficient strategy is to contribute from your pre-salary tax to your superannuation so that the money is taxed at a 15% concessional rate and not under the marginal tax rate. You can also maximise your contributions by sacrificing a portion of your salary through your employer so that you can reduce your taxes.
When choosing a fund, you must be aware of the effect the various investment strategies of your fund manager will have on your after-tax return. However, this comparison is not compulsory so you must ask for after-tax results.
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