The tax benefits available to investors come in a variety of forms:

• Capital Gains. A capital gain is the profit made when an asset is sold for more than the purchase price. For example, if you sell an investment property for $500,000 (after all expenses), and its final cost base was $300,000, you will make a capital gain of $200,000. If you owned the property for more than a year, you will only have to pay tax on half the capital gain.
  
  
• Interest Expense Deductions / Negative gearing. Negative gearing is a popular strategy for investors. This involves borrowing money for investment purposes. If the interest payments on the loan are greater than the income received from the investment, this ‘loss’ can usually be claimed as a tax deduction against other income. For negative gearing to work, the investment needs to produce an eventual capital gain sufficient to offset the “loss” after allowing for any tax deductions.
  
  
• Up-front tax deductions. Some types of investment, typically agricultural schemes, allow you to claim a tax deduction for your initial investment in the scheme. Each scheme is different, and investors should check that the scheme has been issued with a ruling from the Australian Tax Office stating that the investment is eligible for a tax deduction.
  
  
• Tax-advantaged income. Some investments, particularly in the commercial property area, pay a significant level of tax-deferred income. In effect, this income is taxed as a capital gain. That means tax is only paid when the investment is sold, and only half of the income is subject to tax.

Take care with seeking too much of a tax advantage. Many investments are promoted primarily on the grounds that they deliver a tax benefit. That’s fine, but only if it’s a good investment in the first place.

This is a specialist area, and each investment will have its own level of potential risk and return. Good advice is extremely important. An IFFP planner can explain the details, benefits and risks of tax-effective investing. Book a free initial appointment with an IFFP planner. In many cases you should also consult your tax adviser.