More dividends = more tax?

Question

I am work full-time and I am an aggressive saver, and regularly invest in exchange traded funds listed on the ASX.

The dividend distributions are getting bigger, which I am happy about, but I am also paying extra tax on this passive income, always receiving a tax bill each year.

Any ideas on how I can reduce my tax liability?

Answer

Hey Sam, this isn’t personal advice and make sure to DYOR, here is some information that I’ve used in my own journey. Franking credits provide a tax reduction for dividends paid by Australian companies, paying attention to the franking level of different ETFs can help calculate how much the dividend yield will be affected by tax. ETFs that have more of the yield in growth and less yield in dividends will lower tax (e.g. 4% dividends and 4% growth will be worse than 8% growth when accounting for tax). Lastly, say you want to invest $100 in an ETF, normally you would pay income tax on the $100 when you earn it and then capital gains tax on however much it grew over your life in addition to further income tax on any dividends. But if you instead contribute that $100 to the same ETF except in super from your pre-tax salary (salary sacrifice), your income tax on that $100 is lowered to a flat 15%, and once you retire you pay zero capital gains tax when you withdraw from super. Dividends in your super are taxed at 15% during accumulation and are tax-free once you retire. If you found this helpful a follow would be appreciated.

Answer

US companies rather than AUS or UK. The only reasoning for this is that US have a tax system that taxes dividends more than capital gains, so US companies are much more aggressive towards growth and pay piddling dividends. Australian companies pay relatively bigger dividends and also don’t have double taxation of company profits, hence franking credits. UK I understand also tends to have higher dividends. Make sure you are claiming your franking credits. I don’t know the deal on other countries.
While I haven’t used them, I believe investment bonds may be useful. My understanding is you buy in through this structure and after 10 years there is no CGT and tax has been paid (at a rate of 30% within the fund). Each year you can top up the investment with up to 125% of what you put in last year but keep the 10 year start point. Probably only useful if on higher income and can continue to invest every year. Investment bonds are not the «bonds» where you lend money to the government or banks and they pay you interest on the loan and eventually return your capital to you.
Super is taxed at 15%, so much less than your investments in your own name but much less accessible. Super and investment bonds are essentially inaccessible until retirement (super) or 10 years (investment bonds).
These questions should be asked of a financial planner, at least why they aren’t applicable to you rather than they have a better product for you. (Sorry I’m a bit cynical of financial planners).

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