An investor can minimise their tax payable through the use of various tax deductions, offsets and exemptions that are available depending on the type of investment asset.
According to the Australian Taxation Authority (ATO), investors can claim deductions for account-keeping fees for accounts that are held for investment purposes, such as cash-management accounts where investment incomes are kept. However, the tax benefits don’t stop there.
Here’s a quick guide to the tax benefits investors can claim for different investment assets.
Shareholders can benefit from tax deductions, imputation credits, refunds and discounts, but investors must meet certain conditions to earn eligibility.
- Tax deduction: Investors who take up a loan to buy shares for their portfolio can claim a tax deduction on the interest charged against the borrowed money. However, this rule only takes effect if the shares were purchased for income-producing purposes.
- Credits and refunds: On the other hand, investors who own dividend-paying shares may bring their tax obligation down to nil or receive a refund if the issuing company attaches franking credits to the dividends. If the investor is within the tax-free range or the imputation credits exceed the individual’s tax payable for the financial year, they may claim a tax refund from the ATO.
However, the investor must satisfy the holding period, related payments and dividend washing rules before being eligible to use any franking credits they receive.
- Discounts: An investor who disposes or sells their shares may be subject to income and capital gains tax (CGT). However, they are only eligible for a 50 per cent discount on their CGT payable if they held the shares for at least 12 months.
Taxation on bonds depend on the type of bond the investor owns, but in all cases, only interest payments and capital gains are subject to tax.
Australian government bonds (AGBs)
Some Australian government bonds have a tax-exempt status on coupon interest payments or capital gain, but this benefit depends on the terms of the bond and issuer.
Treasury indexed bonds (TIBs) and exchange-traded treasury indexed bonds (eTIBs) are generally exempt from non-resident interest withholding tax, but taxation on any income derived from the bonds would still largely depend on the Commonwealth and Australian State laws.
However, if the bondholder doesn’t provide a tax file number (TFN) or Australian business number (ABN) to the Clearing House Electronic Subregister System (CHESS) Registry, income from their coupon payments will be taxed.
If the bond is simply redeemed without triggering any capital gain, the face value paid by the company upon maturity is exempt from tax. The only time the face value becomes taxable is when the investor profits from the bond.
Losses from corporate bonds are also tax-deductible, but only if it is a result of redemption or holding to maturity.
Profits and losses may also lead to taxation or deduction if the bond was sold prior to maturity. In such cases, however, they are not treated as capital gain or capital loss.
Investors also gain some tax benefits from investing in property. However, they must always be updated with regulations because the ATO is continuously tightening the rules with regard to tax deductions on investment properties.
For instance, the tax office disallowed two rental property deductions beginning July 1, 2017: travel expenses and used and second-hand depreciating assets.
As of July 2018, the following investment property tax benefits are still enforced:
- Borrowing expenses
- Capital works expenditure
Borrowing expenses refer to fees and expenses related to the purchase of property such as loan establishment fees, preparing and filing mortgage documents, title search fees, mortgage broker fees, valuation fees, lender’s mortgage insurance and stamp duty on the mortgage.
Note that the stamp duty on a mortgage is different from the stamp duty property owners pay to transfer or acquire the property title because the latter forms part of the cost base and is not deductible.
Capital works expenditure
Capital works expenditure refers to expenses related to renovations, alterations or structural improvements made on their residential investment property.
However, the following conditions must be met before gaining eligibility for capital works deduction:
- Construction work should be complete
- Total capital works deductions may not exceed the construction expenditure
- The deduction rate is 2.5 per cent or 4 per cent, depending on when the work began
- Deductions should be spread over a 40-year period
- Deductions may only be claimed during the period when the property is available for rent or has been rented
- The amount that will be claimed should be removed from the cost base
Beginning July 1, 2017, ATO only allows depreciation claims for new assets purchased for a rental property.
Superannuation is also a tax-effective system that invests money for the sole purpose of securing retirement benefits. All investments and assets within super is taxed at only 15 per cent.
Those who salary sacrifice are allowed to claim a tax deduction on their personal contribution. However, a fund member who claims a tax deduction on personal contributions will no longer be allowed to claim a super co-contribution for that amount.
This information has been sourced from the Australian Taxation Office, ASIC’s Moneysmart and Smart Property Investment.