Understanding our tax system, and seeking qualified financial advice, can help you to arrange your finances legally so you pay less tax and maximise your wealth. Australia has a progressive tax system, where our individual tax rate increases as our income increases. Our Medicare levy of 1.5 per cent is levied on taxable income. The tax rates for resident individuals at 1 July 2007 are:

Holding money in cash
The interest we earn on our savings is taxed at our marginal income rate. For many individuals, holding large sums in cash does not necessarily produce the most beneficial financial outcome.

Consider Sally, a 27-year-old single woman, who works as an IT consultant and earns $110,000 a year. She lives at home with her parents and is able to save $2,000 per month, which she deposits into an online savings account, paying 7 per cent per annum. At the end of the fi nancial year, Sally earns $930 in interest, of which she needs to pay $385 in tax.1

Investing in shares
Depending on Sally’s goals, she may achieve a better wealth creation and tax outcome if she chooses to invest her savings into a share portfolio. Depending on the shares purchased and the performance of the portfolio, Sally may receive a higher rate of return, together with dividend income. Franking credits will actually reduce the amount of tax Sally needs to pay.

Investing in shares produces most benefi t when utilised as a long-term strategy, taking into account that selling shares incurs capital gains tax. The impact of capital gains tax is reduced when shares are held for a year and a day, as tax is only payable on 50 per cent of any capital gain.

Capital gains tax is less substantial than the tax incurred on interest earnings in the online savings account. This is because capital gains tax is not payable until shares are sold. If Sally holds shares over a relatively long period of time (for example, fi ve years) she effectively defers paying capital gains tax, and when it is payable, she is entitled to a 50 per cent concession.

Salary sacrifice
At first, Sally is reluctant to salary sacrifi ce into superannuation, as she is unable to access her superannuation funds until she reaches 60 years of age. However, Sally discovers that if she invests $1,000 in superannuation she automatically has 45 per cent more to invest. In addition to this, the earnings on her investments within her super are taxed at 15 per cent instead of her marginal tax rate of 45 per cent. Over time, the difference in tax rates and the effect of compounding will make a signifi cant difference to Sally’s total wealth, as well as minimising her tax.

Splitting income

One way to maximise wealth within a family unit is to hold assets and investments in the name of the lowest income earner. Take the situation of a married couple with a young child. Jarrod earns $110,000 per annum,
and his wife Kylie has an assessable income of $5,000 per annum from casual employment. Kylie and Jarrod would like purchase a new car. Instead of borrowing, they decide to delay the purchase and open
a high-interest savings account in Kylie’s name, so that the interest on their savings is not taxed. After some calculations, Jarrod and Kylie see that this strategy means that if they earn $1000 in interest, they are 71 per
cent better off.

They also decide to hold their investment portfolio in Kylie’s name, so that they pay less tax than if it was held in Jarrod’s name.

Another option for Jarrod and Kylie to enhance their wealth is to use superannuation.

Jarrod already salary sacrifi ces at the maximum level into his own superannuation fund, and decides to make a spouse contribution to Kylie’s superannuation. Jarrod can access the maximum spouse contribution tax offset of $540 by contributing $3,000 into Kylie’s superannuation, which is effectively a guaranteed 18 per cent return.2

It’s important to work with a qualified financial adviser to assess your own situation and determine how to best structure your fi nancial affairs to generate wealth.

1 Assumes interest is paid at the beginning of the month, and that each month has the same number of days.
2 To use this strategy, both the receiving and contributing spouse must be Australian residents, and the receiving spouse’s assessable income and reportable fringe benefits must be less than $13,800 per annum. The maximum tax offset is 18 per cent on the first $3,000 contributed to the spouse’s superannuation fund.