Tax beaters in mix for investors

A GOOD investment and a way to beat the taxman - you've got to love it.

beat taxman your money

A GOOD investment and a way to beat the taxman - you've got to love it.

Tax-smart investing are the new buzzwords and to paraphrase late billionaire investor Kerry Packer, if you don't minimise your tax, you should get your head read.

So in the spirit of reducing future tax bills, Your Money sought out some tax-smart investment options  - although the experts warn it's not all about the tax.

"Don't be dazzled by the bright lights of tax deductions, you've got to first look for a good investment," Vanguard Investments principal Robin Bowerman says.

"Obviously tax structures make a good investment more effective, but they can't save a bad investment. Anyone who was in a forestry scheme is testament to that. You have to make sure you understand the underlying investment."

-- Structures

There are basically only two ways to minimise your tax when it comes to investing: One is through a structure that offers a tax benefit and the other is through an investment that has a tax benefit.

For example, trusts offer a tax benefit because you can spread the profits across several people. In turn, those people (beneficiaries) pay tax on their share at their marginal tax rate.

This is popular with families where some members are on low incomes and can make the most of tax-free thresholds.

Superannuation is another structure with a tax benefit, Bowerman says.

"For people on a mid to high tax rate, superannuation is the simplest tax concession you can get," he says.

"The first rule with superannuation is to make sure you contribute up to the $25,000 cap to get the maximum concession through super."

Super contributions are taxed at 15 per cent  - well below the average marginal tax rate  - and profits within super are also only taxed at 15 per cent. After age 60, of course, withdrawals are tax-free.

IOOF national technical manager Damian Hearn says for most people, tax-smart investing outside super boils down to either finding tax-paid investments, such as fully franked dividends or investment bonds, or earning income that keeps you below the tax-free thresholds of up to $20,500.

This can mean putting the investment in the name of the person who has the least income. "If you are a low-income earner or have a non-working spouse, then you're probably best off structuring the investment so that it is held in that person's name," Hearn says.

This works best for most investments, except those that involve negative gearing, where it's often best to have the investment in the name of the highest marginal taxpayer, to get the biggest benefit.

-- Investments

Investment bonds, previously known as insurance bonds, are one way to beat the taxman.

Not only do they pay tax at a rate of 30 per cent on profits (below many marginal tax rates), but if you hold them for more than 10 years they can be cashed in tax-free, Hearn says.

"Another advantage is because they are taxed within the bond, nothing needs to go on your personal tax return each year as it increases in value.

"Bonds work very well for people paying tax above the 30 per cent rate."

HLB Mann Judd partner Jonathan Philpot says company shares offer a way to beat the taxman.

"Australian shares paying a fully franked dividend is a far more tax-effective income stream than interest from a term deposit," Philpot says.

"But I'm not a big fan of margin loans for shares.

"They can force you to sell them exactly when you should never sell shares  - when the price has fallen." Assist Finance chief executive Jason Di Iulio says negative gearing property investments can beat the taxman and build a solid investment. He says real estate has a "federal government-endorsed tax incentive" by allowing any losses from the property investment to be offset against tax paid on other income.

Di Iulio also recommends taking advantage of the National Rental Affordability Scheme, which offers even greater incentives and grants for property investors who provide new housing at discounted market rates.