Tax Advantaged Income
One of the main differentiating factors with various investment asset classes is the impact of tax and the treatment of income for taxation purposes.
A comparison of a Natgen Investment Trust with a bank term deposit can be useful, given that bank deposits have no taxation allowances beyond standard taxation law.
A Natgen Investment Trust allows the pass-through of asset-level taxation allowances to the individual taxation returns of the unitholders in the trust – this is known as a pass-through trust. Up to 100% of the income from the units can be offset against the taxation allowances for commercial property ownership, and if the allowance for the year is greater than 100% of the income, the excess allowance can be carried forward to future years.
The taxation allowances which qualify for this treatment are:
- Building depreciation allowance (2.5% of the value of the building per annum);
- Depreciation of specific fixtures within the building (variable, but >2.5% of the value per annum);
- Borrowing costs relating to debt on the asset;
- Certain acquisition costs relating to the property
Whilst these allowances can substantially reduce the tax burden during the operating period of the trust, they also act to reduce the cost base of the asset when the time comes to sell the asset. This cost base is the figure used to calculate capital gains tax for the units. In this context, the allowances constitute a tax deferral – the taxation payment is deferred a number of years into the future.
However, there is another benefit – if the investment is held for greater than 12 months, the rate of capital gains tax is substantially lower than income tax for many taxpayers:
- For an individual or a trust, the rate of CGT payable is discounted by 50% compared to the income tax rate for that same amount.
- For a superannuation fund, the reduction amount is 33.33%.
- Companies do not get a CGT discount.
Additionally, you may be able to defer income from years where you are paying a high marginal rate to years when your income is less, thus taking advantage of lower marginal tax rates. Or possibly have some capital losses to offset against capital gains (these can’t be offset against income).
So, the benefits of converting income into capital gain can be very substantial indeed.
The below case study illustrates this point for an investor taxed at the top marginal rate (+ Medicare Levy), holding bank deposits paying 9% (no tax advantages) and a Natgen Investment Trust paying 9% (100% tax advantaged) held over a five year period.
|
5 year bank term deposit |
A Natgen Investment Trust (5 year term) | |
|---|---|---|
9% Interest | 9% Distribution (100% tax advantaged) | |
Investment Amount | $100,000 | $100,000 |
Annual Payment to Investor (@9%) | $9,000 | $9,000 |
Income tax payable | $(4,410) | - |
Annual free cash after tax | $4,770 | $9,000 |
After 5 years | ||
Total cash received after tax | $23,850 | $45,000 |
CGT payable at end of investment | - | $(11,025) |
TOTAL INCOME AFTER ALL TAXES | $23,850 | $33,975 |
Of course, the above takes no account of possible capital growth (or reduction) of the value of the units in the Natgen Investment Trust. The bank deposit will only ever return the exact same amount deposited.
Note: The above calculation is for illustrative purposes only and is not intended to be either tax advice or to pertain to your specific circumstances. Bank term deposits are not returning 9% currently, but this high rate has been used for direct comparison to a Natgen Investment Trust.