Taxes are one of those hated things that people would prefer to pay less. There are some tax breaks that the ATO want people to use.
You don’t need teams of accountants to take advantage of some of the best tax breaks out there. You don’t need to be based in the Cayman Islands to achieve a low tax rate.
Taxes can be a big drain on your wealth accumulation, that’s why I think it’s important to take advantage of these two tax breaks:
Australia is unique in the world in that it’s the only country to try to avoid double taxation by allowing the individual to benefit from a refund/credit of the tax paid by the company, which reduces their taxes owed on their tax return, or it can lead to a tax refund if their tax rate is low enough.
Franking credits significantly reduce the tax burden of individual who receive dividends.
It’s certainly true that the franking credit system may have distorted some blue chips like Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and BHP Group Ltd (ASX: BHP) to pay out bigger dividends than if they were based in another country.
However, long-term investors in some growth shares like REA Group Limited (ASX: REA), Carsales.Com Ltd (ASX: CAR), SEEK Limited (ASX: SEK), Ramsay Health Care Limited (ASX: RHC), Aristocrat Leisure Limited (ASX: ALL) and so on are now benefiting from fully franked dividend payments which are favourably taxed, whilst also getting the benefit of growth.
Superannuation is a huge tax break that everyone should be taking advantage of. Working Aussies that use super see the earnings that go into there taxed at 15%. This tax rate is lower than every tax rate except for the lowest rate (of 0%). The investment earnings are also taxed at a lower rate.
The difference that taxes can make on a lifetime of compound earnings is huge. The difference could be tens or even hundreds of thousands of dollars.
The great thing about superannuation is that for most employees it’s just building up passively for you, as long as you’re being properly paid your super and it’s invested in mostly growth assets.
Both of these tax breaks are some of the best and most generous in the world. I hope you’re taking advantage of them, or at least superannuation.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended carsales.com Limited, Ramsay Health Care Limited, REA Group Limited, and SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.