How to reduce your tax burden: A guide for seasoned investors

For seasoned investors, managing tax liabilities is a critical component of maximising returns and preserving wealth. As your investment portfolio grows, so does the complexity of your tax situation. Finding effective strategies to reduce your tax burden can make a significant difference in your overall financial health. In this guide, we’ll explore various strategies to reduce your tax burden, and how the Funding Income Trust can play a role in your tax-efficient investment strategy.

Understanding your tax obligations as an investor

Before diving into strategies to reduce your tax burden, it’s important to understand the types of taxes that may apply to your investments in Australia:

1. Capital Gains Tax (CGT)

• Capital gains tax is applied to the profit made from selling an asset for more than its purchase price. The amount of CGT payable depends on the holding period of the asset and your marginal tax rate. Assets held for more than 12 months may qualify for a 50% CGT discount.

2. Income Tax

• Income tax applies to the earnings generated by your investments, such as dividends, interest, or rental income. These earnings are added to your taxable income and taxed at your marginal tax rate.

3. Franking Credits

• Franking credits (or imputation credits) are tax offsets that prevent double taxation on dividends. Investors can claim a credit for the tax already paid by the company, which can reduce their income tax liability.

4. Goods and Services Tax (GST)

• While GST generally does not apply to financial supplies such as shares and bonds, it may be relevant for certain other investments, particularly in real estate or business ventures.

Strategies to reduce your tax burden

There are several strategies seasoned investors can employ to manage and reduce their tax burden:

1. Hold investments for longer than 12 months

One of the simplest strategies to reduce your capital gains tax is to hold investments for more than 12 months. By doing so, you may qualify for the 50% CGT discount, effectively halving the taxable amount of your capital gain. This strategy encourages long-term investing and can significantly reduce your tax liability when you eventually sell your assets.

2. Invest in tax-efficient vehicles

Investing in tax-efficient vehicles such as the Funding Income Trust can help reduce your tax burden. The Funding Income Trust is a managed investment scheme that offers regular income distributions. By investing in a trust, you can benefit from the potential to earn income in a tax-efficient manner, as trust distributions may carry franking credits or other tax advantages, depending on the trust’s structure and the underlying investments.

3. Utilise negative gearing

Negative gearing is a popular strategy among property investors, but it can also apply to other investments. When the costs of holding an investment, such as interest on a loan, exceed the income generated by the investment, the resulting loss can be used to offset other taxable income. This strategy can reduce your overall tax liability, but it’s important to consider the risks and ensure that the investment aligns with your long-term financial goals.

4. Maximise your superannuation contributions

Contributing to your superannuation is one of the most tax-effective ways to save for retirement while reducing your taxable income. Concessional contributions to superannuation, such as salary sacrifice or personal deductible contributions, are taxed at a flat rate of 15%, which is typically lower than most investors’ marginal tax rates. By maximising your concessional contributions, you can reduce your taxable income and grow your retirement savings in a tax-efficient environment.

5. Consider tax-effective charitable donations

Donating to eligible charities is not only a way to support causes you care about but can also provide tax benefits. Charitable donations over $2 to registered charities are tax-deductible, reducing your taxable income. By strategically timing your donations, you can maximise the tax benefit and reduce your overall tax liability.

6. Offset capital gains with capital losses

If you’ve incurred losses on certain investments, you can use these capital losses to offset capital gains from other investments. This strategy is known as tax-loss harvesting and can help reduce the capital gains tax you owe. If your capital losses exceed your gains, you can carry forward the remaining losses to offset future gains.

7. Take advantage of franking credits

Franking credits attached to dividend income can be used to offset your income tax liability. If the franking credits exceed the tax payable on your dividend income, you may be entitled to a refund. This strategy is particularly useful for investors in lower tax brackets or retirees who rely on dividend income from Australian shares.

8. Structure investments in a family trust

Family trusts can offer flexibility and tax efficiency by allowing income to be distributed to beneficiaries who may have lower marginal tax rates. By distributing income to family members in lower tax brackets, you can reduce the overall tax liability of the family unit. However, it’s important to seek professional advice when setting up and managing a trust to ensure compliance with tax laws and regulations.

How the Funding Income Trust can help reduce your tax burden

The Funding Income Trust is a managed investment scheme that offers a diversified portfolio of property-backed loans, providing investors with regular income distributions. By investing in the Funding Income Trust, seasoned investors can benefit from:

• Regular income distributions: The trust provides consistent income, which can be an attractive option for those looking to generate cash flow while potentially reducing their tax burden.
• Tax-efficient income: Depending on the trust’s structure and the underlying investments, distributions may carry tax advantages, such as franking credits, which can reduce your overall tax liability.
• Diversification: The trust offers exposure to a diversified portfolio of property-backed loans, which can help spread risk and provide a stable income stream.
• Professional management: The trust is managed by experienced professionals who understand the complexities of tax-efficient investing, allowing you to benefit from their expertise.

Get started

Reducing your tax burden is a key component of effective investment management, especially for seasoned investors with complex portfolios. By employing strategies such as holding investments for longer periods, utilising tax-efficient vehicles like the Funding Income Trust, and taking advantage of franking credits, you can optimise your tax situation and maximise your returns.

At Funding, we are committed to helping investors achieve their financial goals in a tax-efficient manner. Whether you’re looking to generate regular income, diversify your portfolio, or reduce your tax liability, our Funding Income Trust offers a compelling solution.

Learn more

For additional resources and information on tax-efficient investing and strategies to reduce your tax burden, explore these helpful links:

• First mortgage loans: A guide for wholesale property investors
• Target return: Maximising your investment potential in wholesale property investing

By leveraging the right financial tools and strategies, seasoned investors can confidently navigate the complexities of the tax system and unlock new opportunities for growth and financial security.