Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 80

Tax and the financial planning process

With the forthcoming Government White Paper on the Australian tax system and some comments that the Murray Inquiry made with respect to tax and the financial system, it is timely to have a look at where tax fits into financial planning.

An indicator of a good tax system overall, as the public finance economists love to say, is that tax should not impact on economic behaviour. Or, to put that another way, taxes should not ‘distort’ economic activity, which in the context of financial planning, means taxes should not ‘distort’ where individuals save because, after all, financial planning is just saving and investing.

All very well in theory. However, this is not the case in the real world and taxes can have a significant effect on how individuals save. In fact, the Murray Inquiry highlighted six different ways in which the Australian tax system distorts the way individuals save and it is these that will come under review with the Government White Paper.

So what are they and how do they affect the way a person saves?

  • Tax affects asset selection by individuals. That is, tax impacts on which assets an individual (or SMSF) will hold. Probably the best example of this is Australian company shares that pay imputation credits. Investors will actively seek out this class of investment specifically to get the tax effect of dividend imputation.
  • Taxes affect asset allocation by individuals. That is, tax impacts how much a person will invest in or allocate their savings to each type or class of asset. Perhaps the outstanding example of this is the family home, which is tax exempt and is the asset class owned by the majority of Australians.
  • Tax affects how much individuals will borrow. The Henry Review noted that the Australian tax system of negative gearing actually incentivised people to ‘gear up’ for favourable tax advantages.
  • Tax affects asset location. In other words, tax affects where the assets are held. SMSFs are the best example, and they have become the preferred holding vehicle for many people’s wealth.
  • Tax affects whether individuals will invest directly or use a financial intermediary. The tax affects here can be subtle, such as the use of carry forward tax losses, which is not as effective in financial intermediaries when compared with investing directly. Some retail and industry superannuation funds do not handle the transition from accumulation to pension efficiently when compared with SMSFs.
  • The Australian tax system affects when to dispose of an asset. Individuals get a 50% tax discount and SMSFs get a one-third tax discount if they wait at least 12 months before disposing of the asset.

 

Although the theory is that the tax system should have no bearing on how people save and invest, these six differences will come under serious scrutiny by both Murray and the Government White Paper.

 

Gordon Mackenzie is a Senior Lecturer in taxation and business law at the Australian School of Business, University of New South Wales.

 

4 Comments
Warren Bird
April 16, 2015

This website, which quotes ABS Census stats, confirms the accuracy of Gordon's statement.

http://www.ahuri.edu.au/themes/home_ownership

Kate
April 16, 2015

The family home is not owned by the majority of Australians. In my suburb Western suburbs Perth) it is approx 33% owned, 33% mortgage and 33 % renters. In the younger age group I know in other suburbs they are renters, mortgage stress (interest only ) or living at home with parents, please explain your facts a bit more clearly.

Mike Timmers
September 26, 2014

It is true that availability of imputation credits is frequently said to affect asset selection (ala point 1 in this article) - of Australian tax residents at least. But should it? Since an imputation credit is a fully refundable tax offset think of it like this - the paying company is distributing that part of its profit on a pre-tax basis and the franking amount has been withheld and remitted to the Tax Office as a type of prepayment of the shareholder's ultimate tax liability. As such dividends could be considered equivalent to other investment incomes, for example such as trust distributions and interest on deposits which are paid from pre-tax profits - which could have tax withheld and remitted to the ATO where the investor fails to provide a TFN or ABN. In this way the gross return from those forms of investments can be compared on a like-for-like basis. What is important is the gross income yield, not so much the tax prepayment represented by the tax withholding.

Of course shares carry a prospect for capital growth as well as risk of loss, compared with a cash deposit, which should be considered in the investor's risk-return equation.

Bruce Bennett
September 23, 2014

If negative gearing is to remain a part of the Australian taxation system, should its scope be limited and its benefits spread more widely? For example, in the case of residential or commercial real estate only allowing negative gearing for investments in new property or, in the case of equities, limiting it to investments in new infrastructure funds.

 

Leave a Comment:

RELATED ARTICLES

Negative gearing: is it a tax concession?

The when and why of four million Australian retirees

Who needs the Caymans? 10 ways to avoid paying tax

banner

Most viewed in recent weeks

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Latest Updates

Investment strategies

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Investment strategies

Don't let Trump derail your wealth creation plans

If you want to build wealth over the long-term, trying to guess the stock market's next move is generally a bad idea. In a month where this might be more tempting than ever, here is what you should focus on instead.

Economics

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Investment strategies

Will China's EV boom end in tears?

China's EV dominance is reshaping global auto markets - but with soaring tariffs, overcapacity, and rising scrutiny, the industry’s meteoric rise may face a turbulent road ahead. Can China maintain its lead - or will it stall?

Investment strategies

REITs: a haven in a Trumpian world?

Equity markets have been lashed by Trump's tariff policies, yet REITs have outperformed. Not only are they largely unaffected by tariffs, but they offer a unique combination of growth, sound fundamentals, and value.

Shares

Why Europe is back on the global investor map

European equities are surging ahead of the U.S this year, driven by strong earnings, undervaluation, and fiscal stimulus. With quality founder-led firms and a strengthening Euro, Europe may be the next global investment hotspot.

Chalmers' disingenuous budget claims

The Treasurer often touts a $207 billion improvement in Australia's financial position. A deeper look at the numbers reveals something less impressive, caused far more by commodity price surprises than policy.

Fixed interest

Duration: Friend or foe in a defensive allocation?

Duration is back. After years in the doghouse, shifting markets and higher yields are restoring its role as a reliable diversifier and income source - offering defensive strength in today’s uncertain environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.