Taxable Income up to:	Tax payable rates
$6,000.00	NIL
$30,000.00	15%
$75,000.00	30%
$150,000.00	40%
over $150,000	45%

Taxable Income up to:	Tax payable rates
$6,000.00	NIL
$30,000.00	15%
$80,000.00	30%
$180,000.00	40%
over $180,000	45%

2 - Government superannuation Co-Contribution

• make personal superannuation contributions (providing they are not salary packaging contributions, and you are not entitled to claim a tax deduction for your contributions);
• have an assessable income + reportable fringe benefits of less than $58,980;
• work for an employer during the financial year;
• be less than age 71 at the end of the financial year;
• not be wholly or substantially self-employed;
• not be a temporary resident; and
• lodge a tax return.

Assessable Income + Reportable Fringe Benefits	Personal contribution required for maximum Superannuation Government Co-contribution	Maximum Superannuation Government Co-contribution
$28,980.00	$1,000.00	$1,500.00
$30,000.00	$966.00	$1,449.00
$31,000.00	$932.67	$1,399.00
$32,000.00	$899.33	$1,349.00
$33,000.00	$866.00	$1,299.00
$34,000.00	$832.67	$1,249.00
$35,000.00	$799.33	$1,199.00
$36,000.00	$766.00	$1,149.00
$37,000.00	$732.67	$1,099.00
$38,000.00	$699.33	$1,049.00
$39,000.00	$666.00	$999.00
$40,000.00	$632.67	$949.00
$41,000.00	$599.33	$899.00
$42,000.00	$566.00	$849.00
$43,000.00	$532.67	$799.00
$44,000.00	$499.33	$749.00
$45,000.00	$466.00	$699.00
$46,000.00	$432.67	$649.00
$47,000.00	$399.33	$599.00
$48,000.00	$366.00	$549.00
$49,000.00	$332.67	$499.00
$50,000.00	$299.33	$449.00
$51,000.00	$266.00	$399.00
$52,000.00	$232.67	$349.00
$53,000.00	$199.33	$299.00
$54,000.00	$166.00	$249.00
$55,000.00	$132.67	$199.00
$56,000.00	$99.33	$149.00
$57,000.00	$66.00	$99.00
$58,000.00	$32.67	$49.00
$58,980.00	$0.00	$0.00

1. If appropriate avoid selling your quality investments - because CGT is only payable when you sell.
2. When you sell your quality investments, defer selling until after 30 June so that you have an extra year to pay any CGT payable. In most case it is the date of the contract to sell that is applicable to CGT, not the settlement date.
3. Try to hold your investment for 12 months or more, so that when you sell, you’ll qualify for a 50% reduction in CGT.
4. When buying investments, consider using a family trust.
5. Companies are not eligible for the 50% reduction in CGT so as a general rule, try not to purchase investments that are likely to grow significantly in a company’s name.
6. Use a superannuation fund to purchase investments that are going to grow substantially in future as tax rates are low and can be 0% when you have started in retirement.
7. Try to sell when your tax rate is low - for example, in retirement
8. Use salary packaging to reduce your income in the year in which you sell investments.
9. Make a tax-deductible contribution to superannuation to reduce your CGT.
10. Reduce any capital gains made by crystallising capital losses to offset against capital gains.
11. Sell shares after a dividend payout because the share price usually recedes a little ex-dividend.

• The person must still be eligible to contribute to super to use the strategy
• A person does not have to have any self-employment income to claim a tax deduction, investment income is acceptable.
• Salary packaging can be used to achieve unsupported person status (the 10% rule mentioned above)

• Timing mismatch.  It is important not to rely solely on investment income to meet interest payments, as investment income may be irregular and the interest payment may be due before the income is received from the investment.  In particular, negative gearing reduces your cash flow because the investment income does not cover interest costs, which may result in a reduction in both cash flow and the ability to service the interest costs.
• Fluctuations in interest rates.  If the income from investments does not change, but interest rates on borrowed funds increase, then you will incur additional costs that will need to be covered from other sources.
• Reduction in capital value.  Although there are potential wealth creation benefits to be gained from gearing, these benefits are achieved at the expense of higher risk.  The following table illustrates that although gearing has the potential to increase capital gains in a rising market, it can also compound a capital loss in a falling market.

	Geared	Non-Geared
Investor Equity	$40,000	$40,000
Amount borrowed	$60,000	$0
Total Investment	$100,000	$40,000
Market Rises 10%
Value of Portfolio	$110,000	$44,000
Loan outstanding	$60,000	$0
Investor's Equity	$50,000	$44,000
Gain in Investor's Equity	25%	10%
Market Falls 10%
Value of Portfolio	$90,000	$36,000
Loan outstanding	$60,000	$0
Investor's Equity	$30,000	$36,000
Loss in Investor's Equity	(25%)	(10%)

Own Capital	$40,000
Borrowed Funds	$60,000
Total Value of your portfolio	$100,000

Own Capital	$40,000
Borrowed Funds	$60,000
Total Value of your portfolio	$100,000

• Potential for increased capital gains and diversification.  Gearing increases the size of an investor's portfolio by allowing them to purchase additional investments with borrowed funds.  Capital gains that are in excess of the after tax cost of funding the geared investment are added to the portfolio's overall return.  By increasing the number of securities in an investor's portfolio, the volatility of the overall investment portfolio may be reduced due to greater diversification.
• Taxation.  Under current legislation, interest payments on money borrowed to invest in income producing investments, together with ongoing expenses, can normally be claimed against your taxable income.  Investors on high marginal tax rates will receive a higher tax deduction and investors on lower marginal tax rates can potentially make greater use of imputation credits and will incur a lower capital gains tax liability when they sell their investment. 

Lending Facility	Pro’s	Con’s
Geared Share Fund Suitable for Self Managed Super Funds	No risk of margin calls Investor does not have to borrow (leverage is obtained via institutional borrowings) Escalated returns and risk as the investments are internally geared The funds are usually actively managed with the objective of neutral gearing. Simple paperwork – no need to complete borrowing applications	Greater volatility (relative to regular ungeared equity funds) due to the gearing within the fund No obvious visible tax deduction to the client, although leverage benefit is received by the client
Home Equity Loan	Limited restrictions on what you can invest in Funding available determined by equity in your home No margin calls Lower cost of finance than margin lending	If the investments fall in value, your home could be at risk if you cannot otherwise repay the loan Paperwork (and some government and legal costs) may apply to the loan
Margin Lending	Security of shares or managed investments required Relatively broad range of investment choice	If the value of the investment falls, you may be asked to invest more money Some restrictions on what you can invest into
Installment Warrants	Leveraged exposure to individual or basket of underlying securities Boosted yields via higher levels of dividend and franking credits	Generally higher interest and borrowing fees relative to other options Must hold installment warrant at term expiring to own the shares outright Administration and time to manage
Structured Products / Protected Equity Loan These comments are general in nature as product features vary significantly	Guaranteed not to loose money if the investment falls in value and it is held until maturity No margin calls Able to borrow up to 100% of the money being invested	The interest rate is substantially higher to pay for the guarantee Only a portion of the interest expenses may be deductible due to the capital nature of the protection Strict restrictions on investment options and rules governing the extend of the protection Very high break even point to cover high finance costs, usually in the vicinity of 5% pa after tax capital growth

• a contribution to a superannuation fund on or after 1 January 2006; or
• an allocated surplus contribution amount that is allocated on or after 1 January 2006

• for taxed splittable contributions – 85%* of the taxed splittable contributions made in the financial year

• the name of the member’s spouse (which includes de facto spouses) in respect of whom the splittable contributions are to be transferred or rolled over; and
• the amount of the member’s tax and untaxed splittable contributions that the member seeks to split for the benefit of the member’s spouse; and
• a statement by the member’s spouse to the effect that they:
• are aged less than preservation age, or
• are aged between preservation age and 65 and have not satisfied the condition of release known as ‘retirement’*

• the member has already made an application in the relevant year and the trustee is considering or has given effect to the application; or
• the requested splitting amount exceeds the maximum splittable amount; or
• the member’s spouse is aged 65 or more, or is between preservation age and age 65 and has satisfied the ‘retirement’ condition of release* referred to above.

• Post June 1983 component (taxed) equal to the taxed splittable contributions requested in the application; and
• Undeducted contributions equal to the untaxed splittable contributions in the application.

• ability to boost the super of the lesser-superannuated spouse.  It may be possible to work towards equalising the superannuation of both members of a couple, where appropriate;
• ability to utilise two low rate thresholds on the post June 1983 component; and
• boost the super of the older spouse, who is able to get earlier access to their super.

• you can claim your interest payments against your taxable income and if earning are less on the investments than the interest payments you can claim the interest against other assessable income
• you can prepay the interest up to 13 months ahead, prior to June 30, which is helpful for cash-flow planning and also allows you to claim the deduction a full year in advance
• you can defer any capital gains tax liability until the shares are sold
• as you're geared into the market you will own more shares than if you had paid cash, so you will receive more dividend payments. If the shares are franked then you can offset the franking credits against your assessable income

---

12 - Minimise your risk

Any recommended portfolio or investment strategy needs to be designed around the risk and return philosophy of financial planning.  This requires an understanding of your attitude to risk and return as well as the risk/return level of the various investments available.

Risk of investment relates to the variability of income and capital returns.  The combined result from income and capital movements – i.e. the extent to which actual investment results may vary from expected returns is classed as the ‘risk’ of the investment.

Risks to income include:

• Risk of partial or complete loss of income.
• Failure of income to increase as expected.
• Uncertainty about income.

Risks to capital include:

• Risk of partial or complete loss.
• Failure of capital to grow.
• Uncertainty about capital value and doubts about marketability of the investment.

The relationship between risk and the expected return from an investment is fundamental to making appropriate investment decisions.  Investments with high levels of risk usually promise high rates of return, while investments with low risk levels offer low levels of return.

Risk return trade off

The concept of investment return is widely understood.  For example, a 10% per annum return on a capital sum of $100,000 would result in $10,000 increase in value for the year.  However, what exactly is ‘risk?’

Risk is for the most part unavoidable – in life generally as much as in investing!  When discussing investments, the term ‘risk’ is often expressed as ‘volatility’ or variations in returns. In investment terms, the concept of ‘volatility’ needs to be understood.  It is the measurement of fluctuation in the market values of various asset classes as they rise and fall over time.  The greater the volatility the more rises and falls are recorded by an individual asset class.  The reward for accepting greater volatility is the likely hood of higher investment returns over mid to longer term.   The disadvantage can mean lower returns in the shorter term.  It must also be remembered that it can mean an increase or decrease in capital.

All investments involve some risk.  In general terms the higher the risk, the higher the potential return, or loss.  Conversely the lower the risk the lower the potential return, or loss.  The long-term risk/return trade off between different asset classes is illustrated in the following graph:

Major sources of investment risk

Major sources of investment risk include the following:

Business risk – The risk that the company’s profit margin may be lower than expected due to inefficient management, bad trading policies and changes affecting that industry.

Financial risk – The risk of partial or complete loss of invested capital in the event of the failure of a company or scheme due to an unsound financial structure.

Market risk/Volatility - The risk of capital loss and instability of invested capital, as well as variations in the return from that capital.  It is caused by market cycles and movements in the market.  It can mean the value of capital can vary, both positively and negatively.  These variations can be daily or less frequently.  They can vary significantly or not much at all.  They can be sudden and unexpected or it can be slow and predicted.

Market timing risk - Economists often use economic cycles (ie. the pattern of the economy), to try and predict when a market will rise or fall.  However, this is extremely difficult, as economic cycles are never exactly the same with the same timing.

Economic risk - Risk relating to changes in inflation rates, interest rates, etc.

Political risk - Changes in Government and Government policies.

Interest rate risk/Re-investment risk - Some investors attempt to avoid volatility by investing in fixed rate investments.  They then face the risk that when the investment matures the money may have to be reinvested and interest rates could be significantly lower.  Thus, if they are relying on the interest as income this income could dramatically decrease.

Credit risk - When money is placed with banks and companies through term deposits and debentures they use it in their businesses and pay an interest rate for doing so.  The risk here is the financial ability of those institutions to be able to pay the interest and/or repay the capital on the due date.

Mismatch risk - This means that although a chosen investment may be considered a good investment for certain investors, it may be a poor one if it does not suit the needs and circumstances of the investor.

Inflation risk - Whether inflation is high or low, the cost of goods has always increased over time.  If the chosen investment does not at least grow at the same rate then the real purchasing power of the money is being eroded.

Liquidity risk - Considerable problems can occur if money is required for unforeseen expenses and the investments cannot be turned into cash quickly or without costs.

Legislative risk - Long-term investment strategies can be selected based on current tax laws and regulations.  If these should be changed later then the results required could be badly affected.

Risk of not diversifying - Diversifying investments means spreading the capital across various areas.  Generally speaking these areas are the actual assets, or markets, in which the capital is invested.  If your investment capital is reliant on one asset, or one class of asset, you are exposed to the risk of not diversifying.  By spreading your investment capital amongst various assets and asset classes, should one area do badly, not all the capital is affected.

Opportunities and risks of the main asset classes

There are really four main asset classes in which to invest.  In an ascending order of potential risk they are ‘Cash’, ‘fixed interest’, ‘property’ and ‘shares’.  ‘Cash’ and ‘fixed interest’ provide mainly interest income, although there is some potential growth (and loss) in the ‘fixed interest’ market.  Such money is on loan to the financial institutions.
‘Property’ and ‘shares’ provide rent and dividend income with far more potential growth (or loss), plus some tax benefits.  The money purchases ownership of the asset.  On a risk/return scale, ‘Cash’ would be ranked as low return/low risk and ‘shares’ would be ranked as high potential return/high potential risk.

Cash

Cash can provide certainty of income, guarantee of capital and is usually secure and handy.  However, when you also consider inflation, fees and tax, the returns can be quite low and there is no opportunity for capital growth.  Interest rates will fluctuate depending on government policy, inflation and global pressures.  Cash provides no tax benefits and is usually good for short-term goals and emergency funds, but over the long-term its purchasing power can diminish and consequently large amounts of money are not usually recommended to be kept in cash.  ‘Credit’, ‘re-investment’, ‘inflation’, ‘mismatch’ and ‘non-diversifying’ are all possible risks of cash investing.

Fixed interest

Fixed interest is a term broadly used to describe investments like bonds, debentures and term deposits. The main characteristic of fixed interest investments is that at the time of investment: the interest rate and the term of the investment are known.  Large-scale investors, like the super scheme on your behalf, usually invest in government and semi-government bonds and corporate debentures. Government and semi-government agencies and other corporations and banks use this money to fund projects of up to 25 years.

In essence, the money is being lent to the institution that, in return, agree to repay interest (regularly) and the principal at the end of the term. Fixed interest investments such as bonds or debentures can be bought and sold and will vary in price depending upon their ‘interest rate’ in comparison to market interest rates at the time. Fixed interest investments are generally less volatile than property and share investments but there is a possibility of growth (or loss) when they are bought or sold prior to the expiry of the original term.  The returns are usually higher than cash and they are often as secure (depending on the financial standing of the institution).  ‘Credit’, “mismatch’, ‘inflation’, ‘re-investment’, and ‘non-diversifying’ are all possible risks of investing in fixed interest.

Property

Property has long been a popular investment in Australia.  Besides residential property there are industrial, commercial and retail properties in which to invest.  Again there are limitations for the individual investor as usually large amounts are needed and it all goes into one property. 

There are substantial costs involved in buying and selling properties and a fair time horizon is required before funds can be accessed due to the time it takes to buy or sell a property.  Rent collection, repairs, refurbishment and dealing with tenants are all time consuming activities. 

Property is situated above Cash and Fixed Interest but below Shares on the investment risk scale.  Consideration has to be given to what property, where, what tenants and how much of an investor’s money is in one property.  Generally speaking, income will come from rent and there will be potential growth in value over time.  Overall, property is suited as a long-term investment and can be influenced by inflation and employment levels as well as economic growth and confidence.  ‘Mismatch’, ‘market’, ‘liquidity’ and ‘non-diversifying’ are all possible risks of investing in property.

Shares

Purchasing shares (or equities as they are also known) means owning a part (share) of a company.  It means having a share in the corporation’s future business.  Historically, over the longer term (5 years plus) they are known for keeping ahead of inflation and generally delivered the highest returns of all investment types.  Conversely, as you would expect, they carry the greatest amount of risk and their values can be very volatile with short-term fluctuations in price.  Income will come from dividends (a share of the profits) and there will be potential growth as the company grows financially.  Consideration has to be given as to which industries, which countries and which company(s) – to invest in.

If the shares are in Australian companies then there may be tax advantages through dividend imputation.  This comes as a result of the company issuing dividends to their shareholders from company profits (after tax).  In turn the Australian shareholder receives a credit against their own tax liability for the company tax already paid.  International shares provide dividend income and often higher potential growth.  Of course ‘shares’ can range from the ‘blue-chip’ to speculative resources.

Diversification of assets

A major method of limiting investment risk is to spread the investment capital over a range of different investment asset classes.  It follows the ‘Don’t put all your eggs in the one basket’ investmentphilosophy, where the individual baskets can include:

Cash and fixed interest investments.
Share-market investments (local and overseas).
Property investments.

The proportional amount invested into each ‘basket’ (ie. the range of diversification of these funds) will depend on the individual investor’s needs and objectives, investment timeframe and attitude towards accepting risk.

Diversification also includes investing into both the local market and overseas markets.  The portfolio’s investment return, therefore, reflects the aggregate performance of the individual asset classes into which the funds are invested.  Diversification provides a protection from risk in that it smooths the volatility of returns by the individual asset classes.

---

13 - Invest what you save

If you're like most people, it’s easier to spend your money than to save it. But saving and investing are often the only way to achieve your big goals like, buying a house, buying a car, buying an investment property, investing in shares, holidaying overseas.

Often it's easiest to save small amounts frequently - maybe by directly transferring some of your money each pay to a special savings or investing account. If you're thinking about investments - managed funds, shares, and others - you need to think about what level of risk you are prepared to take. The higher the return, the higher the risk that you may loose your money.

Remember that there are no easy ways to "get rich quick". Stay away from investments that promise incredibly high returns for low risk and little work. They are usually scams. Other warning signs for scams are:

Be cautious. If you think an investment opportunity looks a bit dodgy, make some enquiries before you commit your money. Check out the Government consumer website at www.asic.gov.au/fido, or talk to a licensed financial adviser.

---

14 - Getting money from your supperannuation before age 55

Unrestricted non-preserved superannuation monies can be paid out to you at any time on demand, irrespective of age, employment situation or financial position, providing the fund rules allow the payment. These are generally benefits that you were previously entitled to be paid but voluntarily decided to keep within the superannuation system.

How much tax you pay on withdrawing these monies, depends on the various components of your superannuation.

Before you withdraw any money from your superannuation it’s a good idea to seek professional financial advice.

---

15 - Make sure you are fully informed before you act

ASIC, the Financial Planning Association and Argentis want you to be well-informed and confident about getting financial advice.

ASIC and the Financial Planning Association have released a booklet called, “Getting Advice - A practical guide to personal financial advice”. It provides tips about:

To view the booklet click here

---

16 - Get your paper work in order

Did you miss out on deductions for because you can’t find your paperwork. Get a folder or file drawer ready to save all relevant receipts and documents. Even if you don’t plan to file until the last minute, you will save time and worry - and maybe even tax preparation fees - if you are well-prepared and organised. Having complete tax records will also ensure you claim the deductions and credits to which you’re entitled and help you avoid penalties and interest on getting it wrong.

---

17 - Claim your net medical expenses over $1,500.00

A rebate is available to a taxpayer whose net medical expenses in the year of income exceed $1,500. The amount of the rebate is 20% of the excess over $1,500.

"Medical expenses" for the purpose of the medical expenses rebate covers payments to doctors, nurses, chemists, dentists, opticians and optometrists. It also covers payments for therapeutic treatment (administered by direction of a medical practitioner), medical or surgical appliances (required by a medical practitioner) and the maintenance of a trained guide dog and remuneration paid to an attendant of an invalid or blind person.

From 1 July 2005 medical and dental expenses which are solely cosmetic in nature will not attract the net medical expenses tax offset.

You should note that contributions to medical or hospital funds or to other health insurance funds do not themselves qualify as rebatable medical expenses. The rebate applies to the medical expenses paid by the taxpayer in respect of himself and of any resident dependants. It applies to medical expenses incurred both in Australia and overseas.

There is no upper limit on the amount of medical rebate you can claim, but the sum of all rebates cannot exceed the amount of the tax otherwise payable. Records must be kept of payments made and refunds from Medicare or private health funds.

Medical expense tax offset for residential aged care facility expenses

It is possible to get a deduction for payments made to nursing homes or hostels (not retirement homes) if: 

If the recipient was not assessed as needing care at levels 1 to 7 but is subsequently reassessed at one of those levels they can claim a tax offset fort payments made from the date the new classification took place.

Residential aged care payments can be for:

The following payments are not covered for tax offset purposes:

You should get tax advice in relation to this aspect of the net medical offset.

Medicare safety net

The gap amount is the difference between what Medicare pays and the Schedule fee. When gap payments for an individual or family exceed a certain amount each year, Medicare benefits will increase to 80% of the Medicare Schedule fee for further out-of-hospital services in that year. The threshold is known as the Medicare safety net.