Tax is the single largest unavoidable cost most investors face outside of investment fees. While you cannot eliminate investment tax, structuring your portfolio thoughtfully can significantly reduce how much tax you pay — legally and within ATO rules.
Understanding How Investment Income Is Taxed in Australia
Dividends and distributions: Taxed as ordinary income at your marginal tax rate. Franking credits attached to dividends offset your tax liability or generate a refund.
Capital gains (assets held <12 months): Taxed in full at your marginal rate (added to income).
Capital gains (assets held ≥12 months): 50% CGT discount applies for individuals. If your marginal rate is 34.5% (including Medicare), your effective CGT rate on a long-term gain is 17.25%.
Inside super (accumulation phase): Investment income and capital gains taxed at 15%. CGT on assets held >12 months: 10% (1/3 discount applied to the 15% rate).
Inside super (pension phase): Investment income and capital gains taxed at 0%.
Key Tax-Efficient Strategies
1. Maximise superannuation
Super is the most tax-advantaged investment structure available to Australians:
- Accumulation phase: 15% tax on income and gains (vs up to 47% outside super)
- Pension phase (age 60+): 0% tax on income and gains from up to $1.9 million balance (2024–25)
- Salary sacrifice contributions reduce your taxable income (taxed at 15% concessional rate in super vs your marginal rate)
Annual concessional contribution cap (FY2025–26): $30,000 (includes employer SG contributions)
For a high-income earner on a 47% marginal rate, the tax saving on a $10,000 salary sacrifice contribution is approximately $3,200/year.
2. Asset location — hold tax-inefficient assets in super
Different assets generate different types of taxable income. By placing tax-inefficient assets in super (lower tax rate) and tax-efficient assets outside, you reduce overall tax drag.
Hold inside super:
- Bonds and fixed income (interest income taxed as ordinary income — benefit from super’s 15% rate)
- International shares without franking credits (no franking benefit outside super)
- High-yield assets generating significant income
Hold outside super (personal name):
- Australian shares with franking credits (most valuable outside super; franking credits reduce/eliminate income tax)
- Long-term growth assets (held >12 months for 50% CGT discount)
3. Use the 50% CGT discount
Hold assets for at least 12 months before selling. This halves the effective capital gains tax rate:
- Top marginal rate (47%): full-rate CGT = 47%; discounted rate = 23.5%
- Effective rate at $80K income (34.5%): full-rate CGT = 34.5%; discounted rate = 17.25%
Avoid selling growth assets within 12 months unless genuinely necessary.
4. Harvest tax losses where appropriate
If investments have fallen below their cost base (unrealised losses), selling them crystallises a capital loss that can offset current or future capital gains. This is “tax-loss harvesting.”
ATO rules to observe:
- Wash sale rule: ATO may disallow losses where the purpose was to obtain a tax benefit and you immediately repurchase the same or substantially similar asset
- Keep a genuine change in position; don’t repurchase the identical ETF immediately
- Capital losses can be carried forward indefinitely to offset future gains
5. Franking credits — maximise their value
Franking credits attached to dividends from Australian companies are most valuable to:
- Investors with low taxable income (credits may generate cash refunds)
- Super pension phase members (100% franking credit refund — no tax liability at all)
If your taxable income is low (retired, low earner), prioritise franked Australian shares in your personal account — the franking credit refund is effectively a return boost.
6. Timing gains and losses
- Income year: Realise capital losses in the same financial year as capital gains to offset them immediately
- Defer gains to next year: If you anticipate lower income next year (retire, part-time), defer selling assets with gains to the lower-income year
- Spread gains across years: Rather than selling all of an asset at once, sell in tranches across financial years to avoid large one-off income spikes
7. Invest in a trust or company structure
For high-income investors with beneficiaries at lower tax rates, a discretionary family trust may provide tax-splitting opportunities. For very high-net-worth situations, investment company structures provide access to the 25–30% company tax rate on retained earnings.
These structures add complexity and compliance cost (setup, accounting, ATO obligations) — professional advice is strongly recommended before establishing them.
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Frequently Asked Questions
How can I reduce capital gains tax on ETFs in Australia? Key strategies include: holding ETFs for 12+ months to access the 50% CGT discount; holding ETFs inside super where CGT is 10% (accumulation) or 0% (pension phase); tax-loss harvesting (selling other assets at a loss to offset gains); and deferring sales to lower-income years.
Is super the best investment structure in Australia? For long-term retirement savings, super is highly tax-advantaged (15% on income/gains in accumulation; 0% in pension phase). However, super is illiquid until preservation age. The optimal structure typically involves building wealth both inside super (for retirement) and outside super (for pre-retirement access and flexibility).
What is the tax rate on dividends in Australia? Dividend income is taxed at your marginal income tax rate. Franking credits attached to fully franked dividends reduce the effective tax rate — and for investors with low income or in super pension phase, generate a cash refund. A fully franked $700 dividend from an Australian company carries $300 in franking credits, for a gross income of $1,000.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.