WHY SHARE INCOME CAN BE HIGHLY TAX-EFFECTIVE INCOME
Term deposits and bonds pay predictable income at regular intervals. But the income they pay is fully taxable.
Conversely, share income in Australia can be very tax effective because our ‘dividend imputation’ system means that if the company has already paid tax on its income, you may get a tax benefit from dividends received from that company. This may make share income more attractive than that from cash and term deposits, as seen by the higher yield in Table 2.
Table 1: DIVIDEND INCOME IS TREATED DIFFERENTLY FOR TAX PURPOSES
Pre-tax yield 5.0% 5.0%
After tax yield at 0% individual tax rate 7.14% 5.0%
After tax yield at 21% individual tax rate 5.64% 3.95%
After tax yield at 34.5% individual tax rate 4.7% 3.3%
After tax yield at 39.0% individual tax rate 4.4% 3.1%
After tax yield at 47.0% individual tax rate 3.8% 2.7%
*Assumes corporate tax rate of 30% and 100% franking level. Source: Perpetual & ATO
HOW SHARES GENERATE GROWING INCOME
Term deposits can pay you a consistent income. That’s because term deposit (and bond) income is almost always a set, simple percentage of the capital you invested.
However, when you invest in shares you are investing in a business constantly seeking to grow its revenue. Whether that’s by buying other businesses, being more efficient, or developing new product or technologies, there are numerous ways a successful business can grow what it earns.
Perpetual’s “Real Value of Investing in Shares” provides a comprehensive introduction to the topic, and a fresh reminder of the pros and cons of sharemarket investing.
If you would like to read Perpetual’s document in full please click on the link below.
This article appeared as part of our July 2015 Newsletter