Australians pay a lot of tax, but many could pay less

According to 2022 tax data, Australia has one of the highest income tax rates in the world. In fact, we’re fourth highest behind Denmark, Iceland and Belgium.

Australians have individual tax rates set by the Australian Taxation Office (ATO) on a sliding scale. At its most basic, the system dictates that you pay tax on all your income at your marginal tax rate. But the system is far from basic, and there are many ways to reduce the amount of tax taken out of your money.

In a lot of cases, it comes down to how you invest.

Understanding your marginal tax rate

Assuming you haven’t taken advantage of a tax-effective provision, or ‘tax break’, every extra dollar you earn will be taxed at your highest marginal tax rate.

These income tax rates show the amount of tax payable in every dollar for each income bracket depending on your circumstances¹.

Your marginal tax rate is effectively your starting point on the road to pay less tax.

You only get one personal tax rate

All your income streams are combined and taxed at your marginal tax rate, whether it be interest income from bank accounts and term deposits, rental income on investment properties, capital gains from buying and selling shares, income from cryptocurrency investments… any standard investment income.

But not all investment income is standard. This is where tax-effective investment options come into play.

Paying less tax on earnings means… more earnings

Tax-effectiveness comes down to advantageous tax treatment for different types of investments. A tax effective investment is one where you end up paying less tax than you would have on an otherwise like for-like investment.

An example is a tax-paid investment, such as an Education Bond, where tax is paid on your behalf, potentially at a rate lower than your marginal tax rate.

The benefit of putting your money into an investment with a tax-effective structure is simple. Comparatively, you could pay less tax.

Different tax rates for different entities

To get an idea of how tax-effective investing works, we can look at tax that applies at a basic level to different investment structures.

Superannuation²

• A tax rate of 15% on employer super contributions and salary sacrifice contributions, if they're below the $27,500 cap.
• A maximum tax rate of 15% on investment earnings in super and 10% for capital gains.
• No tax on withdrawals from super for most people over age 60.
• Tax-free investment earnings when you start a super pension.

Companies³

• Base rate entities: 25%
• Otherwise: 30%

Trusts⁴ 

• Adult and company beneficiaries pay tax on their share of the trust's net income at their marginal tax rates.
• Different rates apply for other beneficiaries and circumstances.

Investment Bonds⁵ 

• Earnings taxed at the corporate tax rate of 30%.
• If no withdrawals are made in the first 10 years, no further tax is payable.
• Tax breaks apply on a sliding scale if withdrawals are made in the first 10 years.

Education Bonds

• Tax is paid on your behalf on the bond’s ongoing investment earnings at a tax rate of up to 30%, which may be lower than your marginal tax rate.
• Withdrawals for education purposes attract the Education Tax Benefit: an additional $30 for every $70 withdrawn from your investment earnings.
• Non-education-related withdrawals from bonds attract the same benefits as Investment Bonds.

Education Bonds: Tax-effective investing with flexibility

Education Bonds are unique among investment vehicles as they offer a variety of tax benefits, and a high degree of flexibility. They’re one of the most tax-effective investment options available to Australians.

A higher rate of return doesn’t always equate to a bigger payout.

Tax on the earnings of an Education Bond is paid on your behalf. Because this is reflected in the unit price, the rate of return may seem lower than a non-tax-effective investment. But when you take into account the beneficial tax treatment Education Bonds attract, the picture becomes clearer.

Some of the features of Education Bonds include:

• Lower tax rates: Tax is paid on your behalf at 30% or lower, the Education Tax Benefit can apply, and non-education-related withdrawals attract Investment Bond tax breaks.

• Compounding power: Investment growth is automatically reinvested, increasing the powerful compounding benefits of tax-effective investing within the lower tax environment.

• Beneficiary income: Tax on a withdrawal for education is assessable for the nominated student. They may pay little or no tax on earnings depending on their marginal tax rate.

You can find information on all these benefits and more here.

Tax-paid, tax-effective investing with Futurity

Whatever your savings goal, Futurity’s range of Education Bonds provide a flexible and tax-effective alternative.

To learn more about how you can take advantage of the tax breaks applicable to Education Bonds, speak with your Financial Adviser about the Futurity Education Bond range or get in touch with us.

All tax rates quoted in this article are correct as at 10 July 2023.

1. https://www.ato.gov.au/rates/individual-income-tax-rates/#Residents 
2. https://moneysmart.gov.au/how-to-invest/investing-and-tax 
3. https://www.ato.gov.au/Rates/Company-tax/ 
4. https://www.ato.gov.au/general/trusts/trust-income/ 
5. https://moneysmart.gov.au/how-to-invest/investing-and-tax