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The Tax Benefits of Long-Term Investing
If you’re looking for the best tax benefits on your wealth accumulation over time, then long-term investing in Australia may offer some advantages that you have yet to consider. In this article, we’re going to look at a variety of ways that you can reduce your tax burden and retain your investment returns, all while enhancing your portfolio’s growth potential.
Understanding Tax-Efficient Investment Vehicles in Australia
Utilising vehicles aimed at reducing your tax liabilities often yields the best results. Learn about three of them below.
Superannuation Funds
Super funds are one of the most tax-effective options for long-term investors. They’re taxed at a concessional rate of 15%, significantly lower than the marginal tax rates for most. Earnings on these funds, like dividends and capital gains, are also taxed at a reduced rate of 15%. Additionally, you can transition these funds to a tax-free pension phase when you retire, which can result in tax-empty withdrawals and earnings from the fund.
Listed Investment Companies (LICs)
LICs can offer franking credits, offsetting tax liabilities on dividends, which can help investors generate tax-efficient income.
Investment Bonds
Also referred to as insurance bonds, these are tax-paid investments, meaning you pay tax at the corporate rate of 30%. After holding bonds for ten years without making further contributions, withdrawals are tax-free. This makes them tax-effective investments for the long term with a focus on reducing future burdens to Australian taxpayers.
Strategies to Minimise Income Tax and Capital Gains Tax
Understanding and implementing strategies to minimise both income tax and capital gains tax is essential for leveraging long-term investing. Here’s how you can turn your holdings into tax-saving investments in Australia.
Hold Investments for More Than 12 Months
Capital gains tax (CGT) applies to profits from selling assets. However, you can receive a 50% discount from CGT by holding those assets for longer than 12 months. Strategically timing your sales to gain this discount can result in major tax savings.
Dividend Imputation (Franking Credits)
The dividend imputation system reduces the double taxation of company profits. When dividends are distributed to shareholders, franking credits are attached. These franking credits represent tax already paid on the company’s profits. In turn, these credits can offset tax liabilities and, in some cases, result in refunds where franking credits exceed tax obligations.
Optimising Asset Location for Tax Purposes
Asset location refers to the practice of placing investments in different accounts or structures based on their tax treatment. By optimising where assets are held, investors can minimise their overall tax exposure. Here are some examples:
- Hold growth assets in tax-advantaged accounts, like superannuation, to benefit from the lower concessional tax rates on annual gains, compared to holding them in a regular investment account.
- Place income-generating assets in low-tax accounts, like superannuation or family trusts, reducing the overall tax burden.
- To take advantage of individual benefits, diversify your holdings across different investment vehicles, such as personal accounts, superannuation, stocks, and family trusts.
Procure Tax Saving Investments With Australian Funds Management Firm EC Pohl & Co
When approached strategically, long-term investing in Australia offers significant tax benefits. At EC Pohl & Co, we provide individually managed share portfolio services to high and ultra-high-net-worth individuals.
As active managers, we focus on long-term financial growth, constructing portfolios from sustainable, quality companies on the ASX. To learn more about tax minimisation for your Australian investments or to speak with one of our professional asset managers, get in touch with us.
EC Pohl & Co are a funds management firm specialising in individually managed share portfolios for sophisticated investors. We focus on sustainable, quality growth companies listed on the ASX, using in-depth research and a long-term investment approach. As a family business, we aim to redefine wealth by considering well-being, responsibility, and connection alongside financial security.
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