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.

 

  •   19 September 2014
  • 4
  •      
  •   
4 Comments
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.

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.

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.

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

 

Leave a Comment:

RELATED ARTICLES

13 ways to save money on your tax - legally

When you can withdraw your super

Should we change the company tax rate?

banner

Most viewed in recent weeks

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

Latest Updates

Economy

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Superannuation

No, Division 296 does not tax franking credits twice

Claims that Division 296 double-taxes franking credits misunderstand imputation: franking credits are SMSF income, not company tax, and ensure earnings are taxed once at the correct rate.

Investment strategies

Who will get left holding the banks?

For the first time in decades, the Big 4 banks have real competition in home loans. Macquarie is quickly gain market share, which threatens both the earnings and dividends of the major banks in the years ahead.

Investment strategies

AI economic scenarios: revolutionary growth, or recessionary bubble?

Investor focus is turning increasingly to AI-related risks: is it a bubble about to burst, tipping the US into recession? Or is it the onset of a third industrial revolution? And what would either scenario mean for markets?

Investment strategies

The long-term case for compounders

Cyclical stocks surge in upswings but falter in downturns. Compounders - reliable, scalable, resilient businesses - offer smoother, superior returns over the full investment cycle for patient investors.

Property

AREITs are not as passive as you may think

A-REITs are often viewed as passive rental vehicles, but today’s index tells a different story. Development and funds management now dominate earnings, materially increasing volatility and risk for the sector.

Australia’s quiet dairy boom — and the investment opportunity

Dairy farming offers real asset exposure, steady income and long-term growth, yet remains overlooked by investors seeking diversification beyond traditional asset classes.

Sponsors

Alliances

© 2026 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.