Easy investing trick to save $4700 in tax per year

A financial adviser has revealed a trick that will let you save thousands on your tax bill – and it’s perfectly legal.

Cutting your tax bill is the only way you can get ahead with money faster without sacrificing more or working harder.

But the tax rules can be complicated and confusing, and if you don’t know how to approach your tax planning it can be overwhelming.

The good news is that when you understand just a couple of the key rules and how to use them to your advantage, you can squeeze more money out of what you already have today.

There are a heap of different things you can do to reduce tax, but by far and away the one thing that has the biggest impact is where and how you invest. Let me explain.

Marginal tax rates

In Australia, we work under a marginal tax rate system, also known as a progressive tax system. These are the current marginal tax brackets (including full Medicare levy):

This shows that as your income increases, so does the ‘marginal rate’ of tax you pay. The implication is that if you’re earning a salary and then start investing, any investment income is going to effectively add on top of your salary income.

Then, 100 per cent of this income will be taxed at your highest marginal tax rate. As this income grows, it may even push you into the next tax bracket and further increase your tax rate.

In some ways this is a good thing, because it means that your investment income is increasing. But because marginal tax rates increase as your income increases, it means the more investment income you earn (or plan to earn) the more tax you’re going to pay.

But it doesn’t have to be this way.

Tax planning across family units is valuable

To explain this next concept I’m going to need a little bit of jargon (sorry). A tax entity is basically anything that has a tax file number (TFN) and that does a tax return each year.

For example, every individual taxpayer in Australia has a TFN and does (or should do) a tax return each year. This means every individual is its own ‘tax entity’. Every super fund, company, and trust also has a TFN and again is its own tax entity.

Different tax entities pay different rates of tax, and this creates an opportunity when you invest. I’ve included an example below showing the tax rates available for a family and the different tax entities they could use to invest. (MTR: marginal tax rate)

You can see from the above, that the difference between paying tax at the highest rate across these groups compared to the lowest is $4700. So if you choose to invest in the lower tax rate entity compared to the highest, you end up with an extra $4700 every single year that can be used to grow your investments faster.

Being smart with where you hold and own your investments makes a serious difference.

How to cut your tax bill

When most people invest, they don’t really think too much about who and where they own their investments. And when you’re just getting started, it doesn’t really have much of an impact on your end result. But as your investments grow, and your investment income builds along with it, tax starts having more and more of an impact on how your money grows.

If you want to be a successful investor, by definition over time your aim is to replace your salary with investment income. This means you should be aiming to build tens or even hundreds of thousands of dollars of investment income every year. At this level, doing even just a little bit better with your tax means a big dollar difference to your bottom line.

If you wait until you’ve already built up your investments, it can be expensive to change who the owner of those investments is – so you need to be smart from the start to reap the rewards later on.

The wrap

It’s easy to get caught up in some of the hype around tax planning and strategies, looking for some tricky move that’s going to beat the system. But the reality is, one of the biggest opportunities to save tax is staring you right in the face.

Any time you invest, think about tax from the start, and be smart with who or where you hold your investments. This will help you reduce the tax you pay, keeping more of your money to grow your investments faster – or to spend and enjoy today.

Ben Nash is a financial adviser and founder of Pivot Wealth, a money management company that helps people invest smarter. You can follow Ben’s content here: Podcast | Free events | Books | Instagram | TikTok | Facebook

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.