InsightsAustralian shares

Why tax matters for income investors

By June 30, 2022July 5th, 2022No Comments
By Dr Don Hamson- Managing Director, Plato Investment Management

Taking into account your own tax situation is very important when investing for income.

Most Australians have to pay tax, so analysing or making decisions from an after-tax perspective is very important. And it’s highlighted in this chart which illustrates the after-tax value of $1 of pre-tax income, plotted for three different tax situations.

First on the left, you see zero tax investors which would be the first $1.7 million in pension phase superannuation, or for charities, or people who have very low income and don’t pay tax. Then you see the same for a 15% tax rate which is the tax rate for accumulation based super, and on the right we’ve looked at it from the highest marginal personal tax rate.

You can see that the after-tax value of income is different for these three different types of investors, and it’s one reason why Plato has a strategy which is targeted for pension phase super because it’s taxed differently to other types of investors.

You can clearly see on this chart the value of franking credits, because $1 of fully franked dividend is actually worth $1.43 because you get a forty-three cent tax credit when you put your tax return in at the end of the year.

So for those investors the only way they can improve their after-tax income is to get more franking credits.

At 15% super the pattern is somewhat similar in that the full franked dividend is still worth the most, but it is not worth as much because you are actually taxed at 15%, so it is only worth $1.21 after-tax. But that’s still substantially more than other forms of income such as rental income, or interest income which has no franking credits, and short term capital gains which are both taxed at 15% and its substantially better even than a long term capital gain because in superannuation you are taxed at 10%. So if you’ve got a $1 long term capital gain its actually only worth 90 cents in $1.

Interesting though if you flip it around and go to the very right hand and you look at the high tax investors, someone paying 45 cents in the dollar plus two cents Medicare, the best way to maximise after-tax income is to receive income as a long term capital gain. And it’s even better to actually forestall realising that gain for as long as possible because you don’t have to pay tax until you actually realise the gain. That’s why many investors argue you should have low turnover strategies because you want to get a lot of capital gains, and long term capital gains.

Strategies for pension phase investors

For pension phase investors, capital gains tax is irrelevant, therfore their dividend income strategies should be managed to maximise after-tax alpha.

That’s why here at Plato we’ve established strategies for the zero tax end of the market because we feel not enough fund managers manage their portfolios for those investors. Yet they’re the investors most reliant on income to make ends meet.

Read next: What are franking credits?

SUBSCRIBE TO OUR NEWSLETTER FOR MORE INCOME INVESTING INSIGHTS

SUBSCRIBE

DISCLAIMER:

This document is prepared by Plato Investment Management Limited ABN 77 120 730 136, AFSL 504616 (‘Plato’). Pinnacle Funds Services Limited ABN 29 082 494 362, AFSL 238371 (‘PFSL’) is the product issuer of the Plato Australian Shares Income Fund (‘the Fund’). The Product Disclosure Statement (‘PDS’) of the Fund is available at https://plato.com.au/. Any potential investor should consider the relevant PDS before deciding whether to acquire, or continue to hold units in, a fund.

Plato and PFSL believe the information contained in this document is reliable, however no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distribution and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so in light of their specific investment objectives and financial situations. Any person considering action on the basis of this communication must seek individual advice relevant to their particular circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws, Plato and PFSL disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information.

Any opinions or forecasts reflect the judgment and assumptions of Plato and its representatives on the basis of information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future.  The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. Past performance is not a reliable indicator of future performance.

Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Plato. Plato and their associates may have interests in financial products mentioned in the presentation.

Leave a Reply