Make tax work for you

MoneySmart
(ASIC)

Be tax savvy

Consider the tax implications of any investment. An investment is ‘tax-effective’ if you end up paying less tax than you would have paid on another investment with the same return and risk. While lower tax can help your savings grow faster, you should never base an investment decision on tax benefits alone.

Here’s some guidance about what makes some investments more tax-effective than others.

Know your marginal tax rate

The first step in understanding how tax affects you is to know what ‘marginal tax bracket’ you are in. This simply means ‘If I earn an extra dollar, how much extra tax will I pay?’ The following table will help you work out how much tax you are paying and what your marginal tax rate is, or you can use our income tax calculator.

Find out your marginal tax rate.

income tax calculator

 Marginal tax rate for regular income (2018-19 rates)

Taxable income Marginal tax on income in this bracket*
0-$18,200 Nil
$18,201-$37,000 19c for each $1 over $18,200
$37,001-$90,000 $3,572 plus 32.5c for each $1 over $37,000
$90,001-$180,000 $20,797 plus 37c for each $1 over $90,000
$180,001 and over $54,097 plus 45c for each $1 over $180,000

*These rates do not include the Medicare levy (usually 2%) or the Medicare levy surcharge (1%-1.5% for high income earners). For more information see ATO: Medicare levy. Temporary budget repair levy is included in the top marginal tax rate.

Joe reduces his tax through super

Let’s take Joe for example, who earns $50,000 per year. That means he will pay marginal tax of 32.5c (or 32.5%) for every extra dollar he earns, as his income falls in the $37,001 to $90,000 tax bracket.

If you can invest so the tax you pay on your investment returns is less than your marginal tax rate, then you are ahead. For example, if Joe puts money in superannuation, he pays at most 15% tax on investment earnings. This is less than his marginal tax rate, so super is ‘tax effective’ for him.

Find out what income is taxable.

Shares and property

Income you receive from investing in shares and property (dividends or rent) will generally be taxed at your marginal tax rate.

‘Franked’ dividends are dividends paid by an Australian company out of profits it has already paid tax on. You will get a credit for the 30% company tax already paid, called an ‘imputation credit’ or ‘franking credit’. This means that a $7 franked dividend is worth the same as a $10 unfranked dividend.

Franked dividends are ‘tax effective’ investments because the tax you pay on them is reduced by the amount of tax the company has already paid. If your marginal tax rate is less than 30% you can have the excess franking credits refunded to you. For more about franked dividends, see dividends.

A capital gain is the profit you make when you sell an investment for more