When selecting your investments, it’s important to take into account any tax implications. For example, any income you earn from your investments must be included in your tax return as it forms part of your taxable income. Additionally, when you sell an investment you may be subject to Capital Gains Tax.

However, certain investment strategies may actually reduce your tax burden. Some of these strategies are summarised below. For further information as to whether these strategies could meet your needs, please consult you financial planner. (See How Can a Charter Financial planner Help?)

Dividend Imputation

A dividend is the portion of a company’s profits which is paid to shareholders. If you receive a “franked dividend”, it means that the company has already paid tax on its profit. As a shareholder, you’re entitled to claim a tax rebate (an imputation credit) which may reduce your overall tax bill.

Income Splitting

Income splitting involves dividing investments and the income that they generate. This strategy is commonly utilised by spouses, and can lower each person’s taxable income.

Income splitting can be particularly advantageous when individuals are in different tax brackets. For example, rather than holding investments solely in the high income earner’s name, a family’s tax burden can be reduced by putting all or part of the investments in the lower income earner’s name.

This is a complex area. Consult your financial planner to find out if you can benefit from income splitting.

Gearing

Put simply, gearing means borrowing to invest. The costs and interest payable on your borrowings are tax deductible and may be offset against other taxable income.

Gearing aims for your investment’s growth (or total return) to outweigh the cost of borrowings over the longer term.

Negative gearing is where the cost of borrowings is higher than the assessable income earned on the investment.

Although negative gearing is traditionally associated with rental properties, it can also apply to other income producing investments such as direct shares and some managed funds.

A word of caution: this is a high-risk strategy that will only suit a limited number of investors. If you want further information regarding the risks and potential benefits of negative gearing, consult your financial planner.