1. Franked dividends
One of the great benefits of investing in stocks listed on the Australian market is the franking credit system – providing shareholders with a tax credit for corporate tax paid on company profits.
Take the example of a retired couple over 55 who jointly own a $1 million share portfolio, producing a fully franked yield of 5%. The grossed-up dividend (which takes into account the value of the franking credits) is 7.14%. This means that in the first year, the portfolio would produce combined cash dividends of $50,000 plus $21,428 in franking credits.
As the couple in this case study has no other taxable income (their superannuation pensions are not included in their taxable income), they will receive a cash refund totaling about $14,000 for excess franking credits. (Excess franking credits occur when franking credits exceed the amount of tax payable.)
2. Franked dividends in super
What if the same $1 million portfolio were held in, say, a self-managed super fund whose assets support the payment of superannuation pensions to each spouse? The key to this tax position is that superannuation assets backing the payment of a pension are not taxable. If the fund – for the sake of simplicity in this example – held no other assets apart from the $1 million, fully franked portfolio, it would receive a cash refund of all $21,428 for excess franking credits.
Under superannuation law, a person can take a transition-to-retirement pension from age 55, and their super assets supporting the pension immediately gain this tax-free treatment. And if the members receiving the pension are over 60, the pension payments are tax-free in their hands.
One of the simplest ways to reduce tax is to hold nonsuperannuation investments jointly or in the name of a lower-earning spouse. Another way to split income to reduce tax is to setup a discretionary trust to distribute income and capital gains to adult family members with low tax rates.
Be warned, individuals under 18 are no longer be eligible for the low-income tax offset on their so-called unearned income (such as dividends, interest and rent). This means that unearned income paid to children – perhaps through family trusts – is subject to the full penalty rates applying to minors.
4. Salary-sacrificed super
This is the last tax year before the standard cap for concessional contributions by members over 50 is halved from $50,000 to the indexed $25,000 cap that already applies to other fund members. (Members over 50 with low super savings will not have their concessional caps halved.)
Concessional contributions comprise superannuation guarantee and salary-sacrificed contributions as well as personally- eductible contributions by the selfemployed and eligible investors. The immediate tax benefits of maximising salary-sacrificed and personallydeductible are that the amounts within the annual contribution caps are taxed at 15% upon entering the concessionally-taxed super system – instead of marginal tax rates.
5. Transition-to-retirement pensions
The strategy of taking a transition-to-retirement pension while simultaneously making salary sacrificed contributions otentially can produce excellent tax breaks that should not be ignored.
The strategy has four main tax advantages. Salary-sacrificed contributions are taxed at 15%, not marginal tax rates; the taxable portion of the pension is taxed at marginal rates with a rebate of up to 15% to age 60; and the pension is tax-free from age 60. And most importantly for members with larger balances is that super fund assets backing the pension payments are tax-exempt.
Further, amounts taken as a transition-toretirement pension – a set minimum must be taken each year – can be recontributed to super as nonconcessional contributions, which have an annual contribution cap of $150,000. The making of non-concessional contributions will help minimise tax on any of your super death benefits eventually paid to non-dependants including financially independent adult children. And, of course, large contributions will replenish or boost super balances.
6. Small business CGT concessions
These concessions together with the standard discount CGT discount for assets held at least 12 months means that owners of eligible small businesses can potentially greatly reduce or wipe-out capital gains tax upon the sale of their enterprises – even if there have been multi-milliondollar gains.
Astute business owners keep a close watch on whether their businesses remain eligible for the small business CGT concessions and gain a full understanding of how the various concessions operate. It is possible to adopt a series of strategies so a business remains eligible for the concessions as long as possible.