Many people are interested in saving and investing more, but their circumstances mean superannuation is not suitable. The ability to contribute to super is now limited and it is only accessible at or close to retirement.
Those saving for future school fees, a new car, a major holiday, or who just want to get ahead without tying their money up until retirement must find other tax-effective options. Some higher income people can’t put more in super because they are already contributing the new $25,000 maximum.
A few are already up to the new $1.6 million super limit. Others don’t trust the super system and Governments’ tendency to change the rules. Non-super investment options are attracting more attention and stronger cash inflows.
Investors should first check if there is a family member with low taxable income who could invest savings and pay little tax. That can be a very effective strategy. Buying an investment property can be a good way to build wealth for those who can take on a major, long term commitment. A property usually involves large borrowings and greater risk, but can do well if carefully selected in the right location.
There is the risk of poor performance, of damage to property, and of loss of tenants and having to make mortgage payments with no rental income. However most properties provide good capital growth over say ten years.
Investing in Australian shares that pay dividends with imputation tax credits, or managed funds that invest in them, can also provide strong, tax-advantaged income and capital growth.
For those who want a smaller scale, simpler investment with less borrowings and risk, tax paid investment bonds may suit. They pay tax on their income at 30 per cent. Returns are completely tax free after ten years, including regular contributions along the way up to limits.
The bonds don’t suit low tax payers but are very efficient for single people in high tax brackets and couples who both have high incomes. Money can be withdrawn before ten years but if it is tax must be paid on the profits at the person’s marginal rate less 30 per cent.
Several investment managers offer the bonds and most provide a range of investment options to choose from, including local and overseas shares, property, fixed interest and balanced.
Setting up an investment company can also defer tax as the company only pays 30 per cent tax. However, extra tax must be paid when the money is withdrawn from the company, at the investor’s marginal rate less 30 per cent. Family trusts can also be useful if some family members are in low tax brackets.
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