Options for building wealth

OLDER super members wanting to boost their retirement savings can make after-tax contributions to their super fund of up to $150,000 a year. "I think the non-concessional contributions are still worthwhile because of the 15 per cent on earnings inside super," Biti says. "If you invest anywhere else in your own name, you pay marginal income tax rates."

By InvestSMART · 12 May 2012

By InvestSMART ·
12 May 2012

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Insurance or investment bonds can be a good option, she says. They are a tax structure under which the bond pays tax at 30 per cent. To get the maximum benefit, the bonds have to be held for 10 years, after which no tax is owed. Investment bonds offer a range of asset mixes in which to invest.

Biti says there is likely to be renewed interest in gearing by those restricted by the caps. Investors would only want to borrow to invest in an asset that is likely to give good capital growth over time, she says.

That's because tax on capital gains on investments held for at least a year is levied at half of the investor's marginal income tax rate. There may be some tax benefits from negative gearing where income from the investment does not cover the interest costs and other expenses of holding the investment.

"People will look at gearing again," Biti says, adding that borrowing to invest can be good as long as the main motivation is not about reducing tax.

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Frequently Asked Questions about this Article…

What is the non-concessional (after-tax) contributions cap for older superannuation members?

Older super members can make after-tax (non-concessional) contributions of up to $150,000 a year into their super fund, according to the article.

Why might after-tax contributions to superannuation be worthwhile for everyday investors?

After-tax contributions into super can be attractive because earnings inside super are taxed at 15%, which is often lower than an investor's marginal income tax rate on investments held personally. That tax rate difference is the main reason the article says non-concessional contributions can be worthwhile.

What are investment bonds and how are they taxed?

Investment bonds are a tax-structured product in which the bond itself pays tax at 30%. If the bond is held for 10 years, the article notes no further tax is owed on withdrawals. Bonds typically offer a variety of asset mixes to invest in.

What does the article say about the range of asset mixes within investment bonds?

The article notes investment bonds offer a range of asset mixes, allowing investors to choose different combinations of assets inside the bond structure to suit their goals and risk tolerance.

What is gearing (borrowing to invest) and when might investors consider it?

Gearing means borrowing money to invest. The article suggests there may be renewed interest in gearing from those restricted by contribution caps. It also advises investors should only borrow to invest in assets likely to deliver good capital growth over time, not simply to chase tax benefits.

How does capital gains tax work for investments held over 12 months?

For investments held at least one year, the article explains capital gains are effectively taxed at half of the investor's marginal income tax rate — commonly referred to as the 50% capital gains tax discount for qualifying assets.

What is negative gearing and are there tax benefits to it?

Negative gearing occurs when income from an investment doesn't cover interest costs and other holding expenses. The article states there may be some tax benefits from negative gearing, because losses can offset other income, but it does not present it as a guarantee and emphasizes considering the investment’s growth potential.

Should I borrow to invest just to reduce my tax bill?

No. The article quotes Biti saying borrowing to invest can be a good strategy, but only when the main motivation is not reducing tax. The focus should be on the investment’s likelihood of capital growth and the overall financial plan, not tax avoidance.