Tax can be a peculiar thing, especially as various forms of income receive varying treatment.
If you don’t invest, those peculiarities could inevitably become frustrations.
Let’s get it out in the open – the worst way to make money is by working for it.
An unfortunate truth, you’re taxed at the source and inevitably you’ll pay a higher rate than an investor.
Let’s assume you’re lucky enough to be earning $80,000 a year from employment, your marginal rate will be 32.5% plus Medicare, bringing your tax burden to $18,747 in the current financial year.
Now let’s assume you didn’t work, but somehow had $2 million spare and stuffed it into a bank account with a 4% interest rate.
Your taxable income would again be $80,000 and you’d need to pay $18,747 in tax, however not until you filed your tax return.
The following year the ATO will expect quarterly PAYG payments, but the money remains in your hands longer, instead of disappearing on pay day.
Now assume that $2 million was used to buy units of a managed fund or ETF and over the year the value increased by 4% giving you an $80,000 gain.
Assuming you’d paid $40 a unit for 50,000 units of the fund or ETF, you’d need to sell 1905 units at $42 to pull out $80,010.
Essentially you still have $2 million invested, plus $80,000, but because the cost base for those 1905 units was $76,200 your taxable income is only $1905 after applying the capital gains tax discount, and you pay no tax.
Finally assume that $2 million purchased a managed fund or ETF that paid 4% in fully franked dividends.
From $80,000 in dividends, your grossed up investment income is $114,285 and at that income level your tax is $30,232, however your dividend imputation credits are $34,286.
When the Medicare levy is deducted you’d actually receive a tax refund of $2,339.
This is a big reason to invest, because in many tax systems around the world your investments will enjoy more favourable treatment than your wages ever will.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances.
