How to get your investment income tax-free?
As inevitable as taxes are, there are some circumstances where investment income can be received tax free. General income tax is paid on the income that is generated from investments. This income can include interest, dividends, capital gains, rental and other general investment income.
When is investment income tax free?
Investment income can be tax free in a number of situations, including:
- The tax-free threshold: If your total income is below the tax-free threshold, then you will not pay any income tax on your investment income. The tax-free threshold for the 2023-24 financial year is $18,200.
- Capital gains tax discount: If you hold a capital asset for more than 12 months before selling it, then you will only be taxed on half of the capital gain. This is known as the capital gains tax discount. When this is combined with other CGT exemption options, this tax can potentially be fully negated.
- Exempt current pension income (ECPI): If you are receiving a retirement-phase income stream from your superannuation fund, you may be eligible to claim an exemption from income tax on the income that is earned on the assets that are used to support your income stream.
Let’s take a deeper look into Exempt current pension income and pensions in super funds:
If you have a self-managed superannuation fund (SMSF) or are a member of a small APRA fund (SAF), you may be eligible to claim an exemption from income tax on some of your fund’s income. This is known as exempt current pension income (ECPI).
ECPI is income that is earned on assets that are used to support retirement-phase income streams. This means that if your superannuation is complying then all of the income received that is related to an account based pension, then the income can be fully exempt from tax.
If your SMSF or SAF is in full pension mode, meaning there are no accumulation accounts in the fund, and the fund is fully complying, then your income generated in the fund including CGT could be fully exempt from tax.
If the SMSF or SAF is only partially in pension mode, this could be due to some balance in accumulation either with the same member or a separate member. For example, if member 1 goes into full account based pension, however, member 2 is still in accumulation and will not start their pension for some time then the income of the fund will need to be apportioned and only some of the income will be under the ECPI and tax free.
If your fund is only partially supporting retirement-phase income streams you can calculate your ECPI using either the proportionate method or the segregated method.
The proportionate method calculates your ECPI based on the proportion of your fund’s total assets that are used to support retirement-phase income streams. This calculation will need to be done by an actuary via an actuarial certificate.
The segregated method calculates your ECPI by segregating your fund’s assets into two groups: assets that are used to support retirement-phase income streams and assets that are not. Your ECPI is then calculated as the income that is earned on the assets that are used to support retirement-phase income streams.
Which method you choose will depend on your specific circumstances. If you are unsure which method to use, you should seek professional advice.
While the options for tax free income are limited, with the right planning and strategy this can be optimised for your circumstances. If you would like to know more contact our office.