Money
Issue No. 24 - August/September 2005
Federal budget interest for investors
by Tony Catt
The Federal Budget opens some excellent opportunities for investors, depending upon their circumstances, to increase salary-sacrificed superannuation contributions, reduce non-deductible debt, practice income-splitting strategies, and to split superannuation contributions with lower-earning or non-earning spouses.
Tax Cuts
From July this year, the income threshold for the top 47% marginal rate rises from $70,001 to $95,001, and to $125,001 from July next year. The lower income threshold for the 42 per cent marginal tax rate rises from $58,001 to $63,001 from July this year, and to $70,001 from July next year.
The most apparent strategies are to use the extra income to increase investments and to reduce non-deductible, non-investment debt. The astute use of the tax cuts for investment and debt reduction could produce significant long-term benefits. Top marginal taxpayers can benefit further from the tax cuts by splitting investment income with their spouses and adult children in lower tax brackets. The investment income redirected to a lower-earning person under an income splitting strategy will now be subject to less tax before the top marginal tax rate applies. (Penalty tax rates apply to investment income received by minors.)
Income-splitting is accomplished by holding assets through discretionary trusts, in partnership with taxpayers who pay tax at lower marginal tax rates, or in the name of taxpayers who pay tax at lower marginal tax rates.
Given the lifting of the income thresholds for the top marginal tax bracket, negative-gearing strategies may become less tax-effective for some clients. This is because many investors may only be able to claim their deductible expenses - such as interest on investment loans to buy equities and property — at, say, 42% instead of 47%, depending upon their circumstances. However, negative-gearing can remain a tax effective strategy for investors who are below the top marginal tax bracket...
