Investment tax: why I’m pleased to be paying more to the ATO

Bigger tax bills are looming for investors thanks to booming property and sharemarkets, but there are things you can do.

For the first time in a decade, I paid tax this year on an investment property – and was happy to be doing it.

No, my sanity has not been destroyed by two years of Covid uncertainty. Of course nobody likes taxes, but my happiness is simply recognising that paying tax on investment income and gains means you’re making money rather than losing it.

Many of Australia’s 2.2 million real estate investors have found themselves in similar territory this year, automatically swinging from negative gearing to positive gearing as surging property prices, record-low interest rates and rising rents combined.

Shareholders are also in line for more tax as a result of higher dividends and the stockmarket’s strong recovery since March 2020, while dabblers in cryptocurrency who sold into the recent boom have probably generated capital gains.

Investing is about building wealth and making money, and when you make money you give some of it back to the government through income tax and capital gains tax.

But not all of it, and you still come out on top after tax.

With negative gearing – where investors can claim a tax deduction when expenses exceed income – you’re out of pocket even after the deduction.

There are several tactics to help taxpayers avoid paying too much to the ATO.

Negative gearing got a lot of attention at the last federal election when Labor tried to change the rules around it and dividend franking credit refunds – key reasons why it didn’t win.

So don’t expect a flurry of new investment tax policies in the upcoming 2022 election campaign, but tax should still be on investors’ minds.

As we head towards the holiday period and a new year, it’s wise for all investors to have a quick think about their tax impacts and strategies, rather than wait until the mid-2022 rush.

INCOME

Tight rental vacancies and rising profits will continue to lift investors’ income in 2022, so make sure you prepare for a higher tax bill or consider ways to lower taxable income.

Extra work-related deductions, investment property depreciation schedules, instant asset write-offs for business owners and tax-deductible superannuation contributions are among the strategies that can be part of a tax plan.

CAPITAL GAINS

The Australian Taxation Office will receive some windfalls in 2022 from capital gains tax, which is where the profit on an investment sale is added to a person’s taxable income – with a 50 per cent discount if they’ve held the asset for more than a year.

Timing the sale of investment assets can be vital in managing CGT, especially with large lumpy assets such as residential property. For example, avoid selling two large assets in the same financial year if that will push you deep into the top tax bracket.

SUPER

Most taxpayers can get a tax deduction for personal super contributions. The annual cap on this for 2021-22 is $27,500, up from $25,000 in recent years, but this limit also includes compulsory employer contributions.

However, some snazzy tax moves can help more people get a bigger super deduction if they need to offset other income or capital gains.

Catch-up rules were introduced in 2018 that allow unused contribution caps amounts to be carried forward for up to five years for people with super balances below $500,000.

And people with spouses who earn less than $37,000 can get a tax offset of $540 a year if they pump $3000 into their spouse’s super fund.