Determining where to invest requires multiple factors to be taken into consideration. One such factor may be tax efficiency. The tax charged on income from a tax-effective investment is less than the individual’s marginal tax rate.

Superannuation

The government provides incentives to save through Super, which make it one of the most tax-effective investments. Contributing to your super and salary sacrifice is only taxed at 15% if yearly income is under $250,000 (30% if over $250,000 which is still tax-effective). The maximum tax that can be charged on investment income in super is 15%, and 10% on capital gains. This is lower than marginal rates at which taxation occurs for most individuals.

Employees should ensure that contributions are not above $25,000, as this is the cap on concessional contributions. Additional tax needs to be paid on any amount claimed higher than the cap.

Insurance Bonds

Insurance companies offer insurance bonds as long term investment options. Earnings in an investment bond are taxed at 30% (Corporate tax rate), which makes them tax-effective for those whose marginal tax rate is above 30%. They are further tax-effective if one is looking to invest for over 10 years. This is because although withdrawals can be made during the 10 years, if no withdrawals are made, no further tax is payable.

The ATO warns against tax-driven schemes, which offer tax concessions for investing in certain assets that provide income in the future as these may be high risk or part of a scam. Investing in superannuation or insurance bonds are safe and reliable methods which don’t pose these concerns.