15 – Low or no tax investments


An investment where the return is either tax-free or concessionally taxed has a relatively higher after tax return than an alternative investment which is not tax-free or concessionally taxed. 

If you and your clients invest in tax free investments you will get better after tax returns. Better after tax returns mean faster and stronger compounding and greater increases in wealth.

Which is what investing and financial planning are all about.

 CGT-free investments?

At least three CGT-free investments present can be identified. These are:

  1. the home, where the CGT principal place of residence exemption applies
  2. a business, where the CGT small business exemptions apply. This includes most financial planning practices and
  3. business premises, where the CGT small business exemptions apply. This usually includes financial planning premises owned and occupied by the financial planner (or related parties).

So, if you want to minimize tax and maximize after tax returns it makes sense to first invest in your home, your practice and your business premises. By making sure you do not derive taxable capital gains you increase the after tax rate of return and become wealthier faster than otherwise.

Concessionally taxed investments?

Most so-called “growth assets” are concessionally taxed under the CGT rules provided they are held for more than 12 months. Growth assets are essentially shares and properties.

These assets are concessionally taxed because:

  1. a large part of the return is in the form of a capital gain, ie an increase in value over time. And capital gains are only taxed if realized, ie if the underlying asset is sold. Unrealized capital gains are not taxed; and
  2. the tax system encourages people to invest in properties and, briefly, in most cases where an asset is held for more than 12 months a capital gain on its disposal will be:
    • 50% exempt if derived by an individual or a trust (but not a company); and
    • 3% exempt if derived by a SMSF (which means an effective 10% tax rate).

So, to maximize after tax investment returns you and your clients should buy blue chip shares and properties (directly or indirectly and hold them for the long term, ie decades or even generations, and not sell them unless you absolutely have to.

Long term investors pay less tax

Long-term investors pay less tax than short-term investors. This means long-term investors usually make more money than short-term investors. In one way the un-paid tax, the latent tax liability connected to the un-realized and therefore un-taxed capital gain, is an interest free loan from the government to help build further wealth.

Further relevant reading

You can read further on tax efficient investing here: The Dover Way. Tax Efficient Investing.

You can read further on tax planning for financial planners here: The Dover Way. Tax Planning for Financial Planners.

The Dover Group