how to utilise Capital Gains to optimise your investments

capital gains tax australia

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Income made through capital gains is more tax-efficient than other income.

It can compound tax-free for decades during the accumulation phase and then be taxed at half the rate of other income. The timing of asset sale for a low-income financial year will reduce your tax rate.

Shares are easier to liquidate in tax-efficient lumps each tax year, whilst property investments are well suited to holding forever, or occasionally inside superannuation.

Purchasing a great quality home in a fantastic area is a popular strategy as your home can be sold tax-free. Active assets (ie a business premises) valued up to $500,000 can also be sold capital tax-free on retirement.

What Are Capital Gains?

Capital gains or losses are the difference between your purchase and sale price of an asset. A capital gain is when you make money, a capital loss when you lose money. Capital gains tax is payable on assets such as shares, property, cryptocurrency, foreign currency and collectables worth more than $10,000. You must declare capital gains on your tax return. But capital losses can sometimes be used to offset gains and reduce tax.

You “realize” a capital gain when you sell an asset that has increased in value from the cost base. The cost base includes the purchase price and costs involved in purchasing and holding the asset. These include stamp duty, transfer fees, borrowing expenses (loan application fees, discharge fees), advertising costs to find a buyer.

Renovation costs to improve a property valuation are added to the cost base. Repairs to maintain the property, in contrast, are deducted against income in the same year. Find further details on cost base inclusions on the ATO cost base page.

If you brought a parcel of shares for $100,000 and sold them for $120,000 your capital gain would be $20,000.

All the time you don’t sell an investment, your capital gains are compounding completely “unrealized” and untaxed. It’s a fantastically efficient way to build wealth whilst you are still working.

Does the ATO Consider Capital Gains Income?

Rather than being a separate tax, the ATO taxes capital gains at your individual (or company’s) marginal rate. The capital gains realized are added to your taxable income. As opposed to your PAYG income, you can get a significant tax discount on income from capital gains.

Income is taxed at a flat rate of 30% for companies, and between 0 and 45% for individuals, depending on their taxable income.

What is the Capital Gains Discount?

Assets held for more than 12 months are eligible for a 50% capital gains tax discount.

This means if you had held those $100,000 worth of shares for over 12 months, and sold them for $120,000 you would only have to pay tax on $10,000 of the $20,000 capital gains.

If you could convert all your income to capital gains, you would pay half as much tax! Not only are capital gains a great way to compound earnings untaxed whilst working, but they are also taxed more efficiently than any other income when you do sell.

It seems counterintuitive that you pay less tax on passively earned investment income than income from hard work, but this is part of what makes investing so appealing.

Capital Gains Can be Lumpy

People often think of capital gains tax in relation to property. Selling a property can result in massive capital tax bills, as you have to sell the whole thing at once. Capital gains property can slow your journey towards financial freedom if this isn’t carefully planned out.

A more tax-efficient way to produce income is an even amount each year, ideally shared between two or more individuals.

A $500,000 capital gain from selling your investment property will incur a huge tax bill, pushing even a non-earner into the top tax bracket.

Buying a block of units, or a strip of shops could reduce this lumpiness, as units or shops could be strata-titled and sold off separately. This would be a high-value investment though, with significant concentration risk from investing so heavily in one street. The investment strategy needs to make sense first, the tax strategy should come after.

Shares, on the other hand, can be liquidated in small chunks, allowing capital gains to be evenly spread over years, incurring little capital gains tax.

FIRE stock market investors can take advantage of this. If they invest enough in shares (ETFs or LICs) that produce minimal dividends and withdraw their living expenses every year, they can pay no, or very little tax. Dividends, in contrast, are taxed at the individual’s full marginal rate.

There is an alternative method to adjust how much of your capital gain is taxable, based on adjusting the capital gains for inflation. This is now only relevant to assets purchased before 30th September 1999. Find out more about the indexation method on this ATO page.

Companies and foreign residents purchasing assets after May 2012 are not eligible for the 50% CGT discount.

Capital Gains Tax Exemptions

Your primary residence is usually exempt from Capital gains tax. It has to be on less than 2 hectares of land and you must not have used it to run a business. This is why many people like the strategy of buying the best house they can stretch their budgets to afford. On downsizing, they can sell and make a good profit (if they brought well and could afford to maintain the place). Some of this cash can then be contributed to superannuation.

You need to move into your home as soon as practicable after purchase to be eligible for CGT exemption. If you move into a previous investment property, it will not become eligible for capital gains tax exemption.

Properties purchased before 1985 do not attract any capital gains tax.

“In this world nothing is certain but death and taxes.”

Benjamin Franklin

Temporary Absence Rule

The temporary absence rule means that you can rent out your previous main residence for up to 6 years without losing the CGT exemption. This is a fantastic deal for those that have to move for work but can also be utilised by retirees moving to their final home. If you move back in after six months of renting, it resets as if you never rented out again, so you could rent it for another 6 years.

If you purchase a new home, you do not need to decide which you will treat as your main residence for CGT immediately. There is a 6 month grace period where you can treat both as your main residence. When you sell one of the homes, you will need to decide whether you want to use the CGT exemption for it (and lose it for the other home).

You will need to know the value of the home at the time it ceased to become your main residence in order to claim a partial exemption, so ensure you value the home when you move out in case your new home is the one you end up claiming as your main residence.

What is a Capital Loss

A capital loss is realized when you sell an asset for less than you brought it for. This is obviously exactly the opposite outcome to the one you want. But the capital loss can be used to reduce capital gains tax. Capital loss cannot be used to reduce your taxable income (eg taken off your PAYG income) but can be used to reduce the capital gains tax payable.

If you brought shares for $100,000 but sold them for $90,000, you would have a $10,000 capital loss 🙁

If, during the same or subsequent tax years you sold that investment property for a $500,000 gain you could use the $10,000 capital loss to reduce your capital gains tax obligation. Instead of paying capital gains tax on $500,000, you would pay it on $490,000 (or half of that if eligible for the 50% discount).

You can “Carry forward” a capital loss for an unlimited amount of time. This means, as long as you keep the documentation proving your capital loss, you can use it to reduce capital gains tax when you sell a profitable asset. As long as the rules don’t change in the meantime of course.

You cannot “Carry forward” a capital gain. The tax is payable with your income tax return at the end of the financial year.

This means timing of sale of your dud investments (if you have any) is important.

Capital Loss Harvesting

Capital loss harvesting is timing a sale of a loss-making investment to reduce taxation of a capital gain. You cannot sell an investment (eg your ETF during a market dip) to rebuy a similar one. This is known But if you had a dud investment you were wanting to sell, you can use the opportunity to reduce a capital gain.

Capital Gain Harvesting

Capital gain harvesting is a technique you can use if you plan to switch out of one form of investment to another. An example would be graduating from a micro-investment app to your 1st brokerage account. If the sale of the assets within the micro-investment account was timed in a year of no or low income, little or no CGT would be payable. The new investment can then be purchased, resetting the cost basis.


Sally opened a RAIZ account and invested $500 per pay. Sally has invested $26000 and has benefitted from $5000 in growth. Sally waits until she is on 1-year unpaid maternity leave to sell her RAIZ investments tax-free and purchase ETFs through her new brokerage account. The new cost basis is $31,000, so only gains above this will be taxable when Sally eventually sells.

Wash Sale Rules

A wash sale is a sale of an asset primarily intended to achieve a tax benefit. It counts as tax avoidance, is illegal and land you in hot water with the ATO, a position no one wants to be in! Optimising a capital gain or loss should be a case of timing a move you were planning to make anyway, not purchasing or selling primarily for a tax benefit.

Special Circumstances – Divorce and Inheritance

The tax treatment of your inherited property depends on how the property has been used before and after inheritance. No capital gains tax is incurred on inheritance. If the deceased always lived in the property, it’s cost base will be the value at inheritance. The property will remain CGT exempt if you then move into the home.

If you rent the property, the CGT exemption only applies to the time before it was inherited, so you will need a valuation at the time of inheritance. Get independent advise if you are in this situation to make sure you get it right.

In the other unfortunate situation of divorce, assets can be transferred as part of the settlement. The capital gains are deferred and the transfer inherits the original cost base. So if you divorce and your ex-partner gets the investment property, no tax is payable on the property when transferred and your ex-partner will eventually pay CGT if the property is sold as if they owned it in their own name all along.

Can Capital Gains Tax be Avoided?

Investments decisions should be made based on tax outcomes. But the tax situation should be optimised as much as possible, once an investment strategy is chosen.

In order to completely avoid capital gains tax you could:

  • Not make any profit (But what’s the point of that)
  • Purchase your large lumpy asset inside superannuation and sell in the pension phase so gains are tax-free. The costs and hassle of managing a self-managed super are a major deterrent to this, as well as more expensive and limited options when leveraging inside superannuation. Get professional independent advice if considering an SMSF. Income during accumulation from rent or dividends will be taxed at only 15% and capital gains at a discounted 10%.
  • Sell a little at a time, with no other taxable income, to remain under the tax-free limit of $18,400 per person
  • Never sell. Keeping assets long-term is an ideal situation, receiving small amounts of tax-free income from outside superannuation and the rest from within super (which is tax-free anyway).

How to Reduce Capital Gains Tax

Paying tax means you are making a profit, so it can’t be all bad. It also pays for our schools, hospitals, roads and much more. But it’s not used all that efficiently much of the time, and few people wish to pay more than their fair share. Here are a few ways you could reduce your capital tax liability:

  • Time the sale of assets in a low-income year (eg post-retirement, parental leave etc)
  • Consider carefully the tax implications at the beginning, duration and sale of an investment and choose who should own the asset after weighing all this up (individual, trust, company, super).
  • Consider using the temporary absence rule. Rent your main After moving out of your home (principal place of residence) you can rent it out for up to 6 years before it becomes eligible for capital gains tax. This is ideal for those having to move across the country for work and planning to return. It can also be used to squeeze a few more years of capital gains (and rental income) out of your penultimate home before retirement.
  • “Active assets” eg assets used for a small business are eligible for a 75% discount if owned for more than 12 months. If an active asset is owned for 15 years and you sell it aged over 55 years to retire, up to $500,000 is exempt from CGT. Capital gains can also be deferred on selling an active asset and rolled over into a new asset. See the ATO page on active assets for more details.

Understanding the tax treatment of investments allows investors to own their assets in the most efficient structure, and time investment moves to minimize tax.

Coming up to tax time fast! What are your tips for getting your tax return organised? Comment below to share your tax hacks.

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Looking for the Best Australian Online Bank? Up Bank Review

There are several online bank account providers that provide far better value than the big four. This Up bank review compares the new Up bank offering with other popular online banking providers. Compare the features to work out which product is best for you.

If you are still paying monthly banking fees, ATM or international transaction fees, it’s time to switch accounts. These online banking products provide better value and faster transactions than the big Four.

At bare minimum, Australians should be paying no monthly fees for banking, and have access to a good range of ATMs fee free.

Up Bank Review – Is My Money Safe with an Online Bank?

The Australian financial claims scheme guarantees savings with all licensed “deposit taking institutions.”

An individual can have up to $250,000 in cash savings, a couple $500,000.

If the deposit taking institution becomes bankrupt, the government are protected and repaid by APRA. ING, ME Bank and Up bank are all covered by the government guarantee.

A Summary of Features with ING, ME and Up Bank

Account keeping feesFreeFreeFree
ATM FeeALL ATM fees refunded as long as: – –Deposit $1000/ mo -Pay using card 5 x mo (or apple/google pay) -Grow savings maximiser every monthRefund of all Australian ATM feesFree at major banks if 5 purchases made using card, google pay or apple pay
Interest Paid April 20211.35% in attached “Savings Maximiser” up to $100,000 0.05% on cash left in everyday account1.1% on up to $250,000 – Need to make 4 monthly tap and go purchases0.7% On up to $1Million
Overseas transaction fees100% rebate of ING international transaction fee of  up to 2.5% of the international transaction.
Refund of international ATM fees
$4 international ATM fee (on top of overseas ATM fee) 1.5% transaction fee on international purchasesFree major bank ATM withdrawals No international fees
Overdrawn interest rateNo dishonour fee (will just not allow transaction)$15 overdrawn fee11.23%
Round UpCan be set to “round up” and deposit remainder of $1 – $5 into savings accountNot internally with ME bankRound up feature available
Instant Transfer of fundsOSKO
Spend trackingNoNoYes
Ability to split savings into categoriesOnly one “savings Maximiser” account allowed linked to each everyday account.  ING do allow multiple accounts to be opened thoughAllows multiple savings accounts for an everyday accountYes – “Savers” can name according to goals.  Unlimited number of savers. Only 1 debit card comes with the account though
Other ProductsCredit cards, home loan, personal loans, superannuation and insurance1% for any “Pink account” card transaction is donated by ME bank to the national breast cancer foundation Credit cards, home loans, term deposits and personal loansSpend tracking – great for those with all their banking in one place

ATM Fees

ATMs seem to be disappearing from our local shopping centres. With pay wave becoming increasingly available, with need cash less and less.

When I do need cash, I find it’s because I’m at a small merchant outside a major shopping centre and am often needing to use an expensive independent ATM.

If your life is already completely cash free, ATM fees are probably not that important. A one off payment of $2-4 is annoying, but no big deal. If you are withdrawing cash monthly, you will want to eliminate fees.

Up bank offer free ATM withdrawals from major bank ATMs, which is adequate for those that rarely use cash.

For those that want completely free ATM access, ME bank offer this without annoying terms and conditions.

ING also refund all ATM fees, but you have to meet a list of demands each month to be eligible. These terms aren’t too onerous for me, because my ING everyday account is used as my “blow it (splurge) money, and I use it regularly.

I can deposit $1000 per month into my ING “Splurge money” account and then transfer the excess back to my primary offset account. I use my card for splurge purchases via paywave 5 times a month or more without any effort.

The new condition that you have to grow your savings maximiser each month could be met by depositing $1 in the account each month, if you weren’t using the savings maximiser for anything else.

If you have a mortgage, and offset account makes far more sense for savings anyway.

Up Bank Review – Interest Earned

Up bank is the lowest interest payer of the group. If you are not planning to save significant amounts in this account, you probably should ignore the interest.

For $5,000 savings over a year, the difference in interest between Up Bank at 0.7% and ING at 1.35% (if you meet all T&Cs) is only $32.50.

If you have a $30,000 emergency fund kept in the account, you could earn an extra $195 by going with ING.

If all savings are kept in an offset, and your online bank account will hold less than $1000, pay more attention to other features that may benefit you, such as free ATMs and international transactions.

Overseas Transaction Fees

How much do you spend overseas? You don’t have to be an international traveller to get hit by these charges! Some operators in Australia are based overseas and you can get hit with sneaky internation transaction fees as a result.

If you do a reasonable amount of online shopping, you are likely to benefit from free international transactions. You can get international transaction fee free credit cards. But, if you need cash overseas, withdrawing cash from an ATM using your credit card is likely to incur a hefty “cash advance” fee.

Up Bank and ING offer free international transactions and ATMs, ideal for those of us dreaming of an overseas holiday.

The international fees listed above are a reason to avoid ME Bank unless you are sure you will not use the card for international transactions or ATMS.

Overdrawn Fees and Charges

Hopefully you will not become overdrawn, but if you do ME and UP bank will both sting you with fees. In contrast, ING simply decline the transaction but do not charge dishonour fees.

Round Up Feature

This feature has become a common offering over the last few years. When you use your debit card, the virtual “change” is transferred to a savings account, mortgage or investment account.

It is a feature that is available with RAIZ from any bank account. I do not personally find it useful, but I can see it would useful for those struggling to save.

The ideas is that if you spend $2.50 on a drink, depending on your settings the 50c change from $1, or the $2.50 change from $5 is swept into you savings/investment account. It is a virtual version of the spare change jar.

Tiny amounts of money are involved. Savers should quickly graduate from this to saving and /or investing designated amounts each pay cycle.

If this feature appeals to you, you could use the internal feature with ING or UP Bank, or use RAIZ of similar with ME.

Up Bank Review – Instant Transfers

Any of the online modern banking products offer OSKO and PayID as well as Apple and google pay. Instant money transfers are convenient.

The big banks seem to lag behind with this, but any of the three products discussed in this article allow instant transfers.

Spend Tracking

Spend tracking is the great new alternative to budgeting. I find this so much more helpful.

Instead of writing an ideal budget that fails to anticipate all the unexpected expenses that inevitably come up, spend tracking actually keeps track on what you spend on what. Savers can then review spending categories each month and work out strategies to cut back.

UP Bank offer spend tracking with their bank account. This is no use if you have multiple bank accounts and credit cards. For those starting out with a single bank account, they may like this feature. They could also probably just categorise the transactions manually.

Spend tracking really comes into it’s own when spending is occurring using multiple cards and accounts. It is really hard to keep track of manually!

Banks currently still don’t allow you to share log in details with apps such as Pocketsmith. The safest option is to upload banking data in to the app. Hopefully with open banking this will become acceptable and easy.

Up Bank Review – Multiple Savings Categories.

Up bank and ME both offer the option to divide your savings into different buckets. This will suite Barefoot investors and those who are always saving for multiple goals. An excel document is an easy work around for those that prefer features with ING but still have a lot of goals to work towards.

Up Bank Review – Summary

Up bank provides a great bank account, with free access to major bank ATMs, international transactions fee free and no monthly account fees. They offer a round up feature, spend tracking and the ability to split your savings into multiple categories.

Those wanting to store thousands of dollars in an account may prefer a higher interest option. Those concerned about being stung with overdrawn fees or wanting to access all ATMs free may prefer ING.

How To Utilize Rentvesting Successfully

Many of us have been urged by well meaning family and friends to “Get a foot on the property ladder” as soon as possible. Are you considering rentvesting but are unsure whether it is the right move?

Young professionals often need to move frequently for career progression, and so home ownership is not an obvious choice. Unless the property meets strict criteria it is better to rent than buy. Others may want to live in an area they cannot afford to buy in (yet).

This article will cover the rentvesting pros and cons to consider when deciding whether to execute this strategy. Find out more about opportunity cost here.

What is Rentvesting?

Some choose to continue renting, whilst purchasing property as an investment elsewhere. This is known as “Rentvesting”.

How Does the Strategy Work?

Rentvesting is traditionally recommended for those that want to buy whilst still maintaining the lifestyle that comes with living close to a capital city.

Properties in large Australian capital cities are unaffordable for most first home buyers. Because of low rental yield (~3% of purchase price), capital centre properties tend to be significantly cheaper to rent than purchase.

As rental income contributes to calculating borrowing power, buyers can often buy a more expensive investment property than principle place of residence (PPOR).

Traditionally, rentvesting involves buying cheaper properties further away from capital city centres, with a higher rental yield.

The idea is that the rentvestor rents, whilst holding an investment property in a less desirable area, that grows in value over time.

This strategy uses the rentvestor’s borrowing ability in the short -term. Hopefully an increase in investment property and salary over time eventually allow the rentvestor to purchase a PPOR.

In the meantime, they have grown their net worth far more than if they were just renting.

Rentvesting Cons – Why may Rentvesting be a Bad Idea?

Whenever considering a financial strategy or investment, it is best to consider risk in investing first.

Interest Payments Can be “Dead Money” Too

The most obvious challenge in this strategy is that buyers are likely buying lower capital growth potential properties.

Not every property value will grow above inflation. Some will fall in value. There is no guarantees fallen values will recover in a reasonable time frame.

Those that brought during the WA mining boom have had a painful journey as property prices slumped for many years. Hopefully, prices are finally recovering. But it’s not obvious which of the current property booms are actually bubbles, about to pop.

A common warning from parents is that ‘Rent money is dead money”. Interest payments on underperforming property is just as dead as rent money. Perhaps worst, as it may prevent you from buying further property if you have more loan than property value.

You May Want to Purchase Your First Home Earlier than Anticipated, and Not be Able to.

An investment property will utilise your borrowing power, and limit future borrowing.

Life seems to change far more quickly than many of us anticipate. Using up your borrowing power on an investment property can mean rentvesters are then unable to buy their first home when circumstances change.

Loss of First Home Buyers Grant Eligibility & Capital Gains Exemption

The other obvious challenge with rentvesting is that buyers lose out on the first home buyers grant. They also miss out on the capital gains exemption they would benefit from in buying a PPOR.

To be eligible for the first home buyers grant, a buyer must move into the property as soon as practicable after purchase. The first home buyers grant should not influence your choice of property or strategy. It is often priced into the asking price (particularly with house and land packages). But it is a bit of a disappointment to miss out, all else being equal.

Your home, as long as you have moved into it once purchased, is exempt from capital gains tax on sale. Many of our parents’ properties have tripled, quadrupled or more in value over 30+ years. Not a cent was paid in tax on that gain, which is unbeatable value in investing.

Any property brought and rented out will be liable for capital gains tax on sale, which creates a substantial dent in profit.

In an ideal world, you would own your PPOR in a high capital gains area, hold for the long-term and sell for a tax free profit decades later.

Taxation on Rental Income

Positive gearing

Any rent recieved will be taxable income. This will eat into the difference between the rent you recieve on your investment property, and the rent you pay for your home.

As you progress in your career, and consequently move up tax brackets, tax will become more substantial. 45% of income is lost in tax if the owner earns more than $180,000.

Negative gearing

If you are paying more investment property interest and other expenses than you recieve in rent from your rental property, it will be “Negatively geared”.

This means, each month you will have to put money into the property for the benefit of owning it. This can obviously impact on your current lifestyle, and type of home you can afford to rent.

Tax benefits soften the loss, and these become more substantial the more you earn.

The most important thing to consider here is that you can definitely afford to hold the property long-term. Needing to sell a property before it has grown enough to recoup costs is financially detrimental.

Rentvesting Pros – When is Rentvesting Worth it?

Capital City Renters Who Can’t Afford to Buy Where they Want to Live

Rentvesting suits those that have a long-term plan not to buy a PPOR. The strategy will suit those on moderate and stable incomes, as taxation of rental yield will not eat into the strategic advantages.

The problem with renting instead of buying is often that the extra cash not spent on repayments often disappears into unnoticed discretionary spending. Check out this article on DINKS and the incredible efforts marketing departments make to sell you things you don’t need.

It may also suit those who have purchased a property previously, and so are already ineligible for the first home buyers grant.

The investment property should be selected with extreme caution. It should have reasonable capital growth prospects, as well as rental yield. You want to be sure the property will be worth more than it is at purchase in a few years, and that you can afford to hold it long term.

This does not suit those who could just do better by purchasing a smaller property with good capital gains prospects, and upgrading in a few years.

Traditional Buy Well and Upgrade Strategy

Buying a basic property in a good area and upgrading over the years is the traditional route. People aim to get their “Foot on the property ladder” with a basic property with the purpose of growing equity and moving (sometimes several times) to get into their ideal home.

No tax is paid on profits, which is a big motivator for those following the traditional route.

Being a multimillionaire on paper is all very well. But if all your net worth is tied up in the property you live in, it provides little freedom.

Equity from your PPOR can, however be used to fund other investments to start building passive income streams.

This strategy will work well for those wanting to live and work in capital cities, with great capital growth potential.

Reverse Rentvesting – A Strategy for Doctors

Reverse rentvesting is taking the traditional concept and turning it on it’s head. This strategy is suited to those living rent free, or subsidised rent, moving regularly or living in an area with poor capital growth expectations.

Accommodation for workers in rural areas is sometimes provided free or cheap. Health care workers are often paid extra to work in remote areas, making this a powerful strategy of geographic arbitrage.

This strategy aims to buy a better quality property as an investment than the home the buyer lives in. It exposes the rentvestor to strong capital growth markets, even if they don’t live in an area where this is relevant.

It also suits those with careers that require them to move regularly. Doctors in training often move every year for several years, making buying a PPOR impractical.

With no intention to settle in a particular area for several years, buying in a strong capital growth area will allow the buyer to leverage savings.

By purchasing high quality property with capital growth potential ,they can utilise tax benefits of negative gearing. The equity produced by increasing property value can compound tax-free for years before the property becomes positively geared.

An Alternative – Share Market Investing + Renting

An alternative to rentvesting, is simply to take the extra cash freed up by renting in stead of buying and invest in passive index funds.

This strategy can be worked out over a weekend and involves a lot less asset selection risk.

If renters can tolerate the volatility of the stock market, it also preserves liquidity so investments can be cashed in for a property purchase at a later date.

This is definitely an easier option, and involves less commitment. It also is likely to be less profitable than a well selected property, due to a lower level of leverage.

An Alternative – Serial Buying and Converting to Investment Properties.

This is a favourite amongst professionals required to move regularly. They purchase where they work, take advantage of the first home buyers grant and meeting all eligibility criteria before moving out.

After moving out of a home, owners can maintain their capital gains exemption eligibility for up to six years if they occupy the property again before sale.

On moving workplaces, they rent the old place out and buy again in their next location. It is a low hassle way to build an investment property that can work out well.

It can also easily build a property portfolio filled with poor quality If working and living in regional areas, the likely outcome is poor (or negative) growth in value, and rental income that is increasingly taxed as the owner progresses up pay grades.

The critical issue, is again, asset selection.

If purchase locations are selected carefully with an investor mindset, this can be a strong strategy. This strategy is not likely to work out well for high income professionals working in regional areas. If able to buy and live in strong capital growth areas, this strategy can supercharge wealth building.

How to RentVest.

The first step in making any major financial decision is working out your long -term wealth building plan. Working out whether home ownership is the right choice for you at the moment should involve maths as well as emotions. Then, decide whether an investment property should be part of your asset portfolio.

If you decide to purchase a property, location and asset selection are critical in ensuring the financial outcome is a positive one. A lot of research and/or professional advice should be involved.

Storing your emergency fund, and additional savings in a mortgage offset, rather than paying off the home loan maintains flexibility and maximum tax deductibility potential.

Most important of all, don’t just buy any property. Remember interest payments can be dead money too.

Have you rented and invested? What’s your choice of strategy and why does it suit you? Comment to help those still trying to calculate the best move.

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Wealth Building Strategies: Dividend Income with Miss Balance

Thanks to Miss Balance for this week’s wealth building strategy: Dividend income focus investing. Investors seem to be split between those focussed on dividends, and those more interested in total return. Aussie Doc focuses on total return, so it’s interesting to see the alternative viewpoint.

Each week, I have asked a finance blogger or podcaster to share their personal wealth building strategies. I am hoping these will be useful to compare lots of different strategies and perspectives to provide ideas and insight in your own investing journey.

To see all the wealth building strategies shared with Aussie doc freedom, check out the Ultimate Step by Step guide to Wealth building, with wealth building strategies.

Name/ Online identity:

Miss Balance


“9 to 5” profession:

Human Resources at a not for profit

Side Hustles:

Support Work – disability and aged care, dog sitting, babysitting, market research and points collecting

What are your investing goals?

My goal is to have an income stream from dividends to pay my basic expenses for me in future when I take time out of the workforce for starting a family or working on passion projects.

What is your investing time frame?  How far along are you?

I have been investing since 2016, so 5 years now. I am currently investing a little over 60% of my after tax income. I will continue to invest long term, though the amount I invest will likely vary over time.

What the most powerful wealth building tool available to you?

The basic of wealth building is spending less than you earn. Some choose to lower expenses, others choose to earn more. I believe a combination of both is most powerful. Then once you have some spare cashflow, it needs to be invested to be able to compound over time.

What wealth building habits are you utilising to reach your goals?

I have optimised spending and also worked on increasing and diversifying my income.

I have continued to add value at my 9-5 job to earn promotions and pay rises, as well as having multiple side hustles that I enjoy and also bring in more income.

Every month I track and review expenses to see how I’m tracking.

Where do you stand on home ownership vs renting? 

I currently rent and have done since I moved out of home. Housing is expensive in Sydney and I have never been committed enough to one location to want to buy.

I like having the flexibility at the moment to be able to move when I want, which I have done a few times. I took the opportunity to move overseas, as well as locally when I got a new job.

Now my commute is only 7 minutes and free as I can walk.  I also enjoy having a smaller rent payment than what I’d be paying for a mortgage and rates, so I’m able to invest the difference.

One day if I have a family with young children, I may be looking for more stability, though for now this work best for me.

Where do you stand on the great property vs shares debate?

I believe both have their place. There is money to be made in property if you have the time and energy to invest in learning about markets, often buying and fixing up properties to sell for a profit. I personally choose to go with shares. There are a few keys reasons for this

  1. Property often requires a larger upfront cost,  with shares I can buy smaller amounts
  2. I can sell a small amount of shares if needed, you can’t sell off the bathroom
  3. If you have tenants, you will need to keep up maintenance and property management, or pay someone else to do it. With shares, nobody calls at 3am to say the water heather needs replacing asap
  4. I don’t have the interest in learning more about property – this is potentially the most important point

Where do you stand on investing for capital growth vs income? 

Currently I’m working towards building a stream of income from dividends to be able to cover career breaks such as starting a family or working part time on passion projects. I believe capital growth will also happen over time, though that’s not my main focus for now.

Do you have any financial regrets?

Not really regrets. I have certainly learnt a lot over the past few years and of course can look back and be mad at myself for not knowing sooner, not savings more, enjoying life too much in the early years etc. Though I don’t see any benefit in doing that.

Instead, I like to focus on how much I’ve achieved, and where I want to move forward to in the future rather than dwelling on the past. Live, learn and move on to new heights.

Any final suggestions?

Don’t overthink it. Investing can be as simple or as complicated as you would like it to be. I would suggest newbies

  1. Understand their risk tolerance
  2. Pick an investment vehicle they are comfortable with
  3. Get started. You can always tweak as you learn more.

Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

How and Where to Invest Your Savings Now

This article may contain affiliate links. If there are any in this article they are marked *. An affiliate link means if you click on the link and purchase a product, at no extra cost to yourself, I will receive a small commission.

Are there any perfectionists among readers of this blog?  Perfectionism is a useful trait in medicine.  But it can cause indefinite procrastination when deciding how to invest. 

If you want to improve your financial situation, you need a plan.  No plan will be perfect, but it will give you a direction to start.   Goals can  be changed, and plans altered.    

There are three main ways to make a plan:


You will need to research a trustworthy adviser.  A retirement age, income and other goals need to to be decided.

2. MAKE YOUR OWN PLAN Again, you will start with setting goals, then work out a strategy of how to achieve those goals

3. START INVESTING NOW and work it out later

Investing without a plan risks needing to change course later.   You will pay capital gains tax on any profits if you sell to move investments.

But keeping your cash in a bank account is losing you real money due to the effect of inflation.  Once you have an emergency fund, men and women need to learn to “invest like a girl“.

But if you have no idea about goals, making a 40-year plan can feel overwhelming.  It’s better to get started than procrastinate indefinitely. 

Small amounts invested regularly over a long time accumulates wealth.  The power of compound interest is incredible.  Investing $100 weekly from age 20 results in $1.146 million dollars by age 60 (assuming 7% Growth)! 

A simple savings calculator for calculating your savings goals can be found at Money smart.  An arbitrary goal to save, for example, an additional million dollars in superannuation is better than none.  You can perfect the plan later when your goals become clearer.

How and Where to Invest: Set a Goal, Time Frame and Strategy

Once you have a goal, calculate the target you need to accumulate within your timeframe.  Next, it’s time to consider broad strategy, before getting into individual investments:

  1. Invest inside or outside superannuation
  2. Invest for capital gains or income
  3. Taxation considerations
  4. Choice of Assets & Asset allocation

How and where to invest your savings: Inside or Outside Superannuation

– Inside Superannuation

Superannuation compels employees to save for retirement.  It obliges you to build wealth through compound interest over your long career. 

Super locks savings away until preservation age (currently 60yo).  This illiquidity is generally considered a disadvantage.  However, it protects investments from impulsive withdrawals.  Failure to stay the course is the biggest risk for most!  

Many employers will allow salary sacrificing into superannuation.  Other (such as self-employed individuals) can tax deduct their superannuation, with the same results. 

Contributions into superannuation are taxed at only 15% assuming gross earnings <$250,000.  This is far lower than most people’s “Marginal tax rate,” saving lots of tax. 

A worker earning $70K salary sacrificing $115 into super will only be ~$78/week out of pocket.


The graph has not taken into account taxation of dividends, which will worsen the higher tax situations.  After retirement, your superannuation can be converted to a tax-free income stream. 

If you (and your partner) earn more than $18,200 annually, investing a little extra into your superannuation is a no-brainer up until you earn ~$250,000. 

– Investing Outside Superannuation

There are a couple of situations in which you are better off investing outside super.

  1. If you intend to retire before the preservation age (whatever it will be at the time). The preservation age is the age you can withdraw super tax free (currently 60).  If you want to retire earlier, invest some outside super to bridge the gap until you hit the preservation age.


  1. If you (or partner) will earn less than the $18,200 annually over the long term. In this case, investing in the non (or minimally) earning spouse can result in tax free growth.  You could expect to invest around $300,000 in a before paying tax on dividends.


  1. If wanting to purchase property as an investment. Borrowing money within a Self-managed superannuation fund usually results in less leverage, higher interest rates, large fees and lots of hassle.  Growth (negatively geared) properties provides tax benefits for the high-income earner.  Rental income from a positively geared property can be tax free if earning less than $18200.     

After retirement, most will aim for around $18200 or less income per person outside of superannuation in order to minimize taxation. 


How and where to invest your savings: Capital Growth or Income Assets

– Investing for Capital Growth

Capital growth investing relies on an increase in value of an asset over time.  Income produced at the time of purchase is not a priority, in fact the investment can cost you money each year initially. 

Capital growth investors expect investments to produce a good income stream over the long term.  This income can result from increasing yield over time, or sale of assets. 

A high earning professional may choose to buy an investment property with good capital growth potential.  Capital growth and yield (net rent) tend to be inversely correlated. 

Rent received on a capital growth property will be inadequate to cover mortgage interest and other costs of ownership.  So, the investment will produce a negative yield overall.  High earners tolerate this because they are focused on creating an income stream only when they retire.  

Tax refunds compensate partly for the lost income, making this a tax efficient investment, as long as the capital growth eventually occurs.  

The capital growth strategy can also be used when investing in the stock market.  Warren Buffet’s investment company Berkshire Hathaway famously pays no dividend.  Companies have a choice when they produce a profit.  To use that income to invest back into the business, or pay a dividend to investors. 

A capital growth strategy can sometimes result in a cash flow deficit despite large asset value – especially with property portfolios. 

– Investing for Income

It seems intuitive to invest for income.  Income investors have their eyes on the prize.  Income starts minuscule, but over time grows.   Income investors don’t want to rely on capital growth that isn’t guaranteed.

Income investing will produce some income faster, which gives investors more cash flow security.  

Below is a graph that demonstrates gross income (yield) produced by two properties that deliver consistent 11% total returns annually. 

The yellow line represents a “Yield” property – with returns consisting from 7% yield, 4% capital growth. 

The orange line represents a “growth” property returning 4% yield and 7% capital growth. 

You can see that the yield property produces more income until around year 21, when the capital growth property overtakes.  Both are assumed to be completely un-taxed throughout.

Income investing usually has a lower barrier to entry.  It is often more suited to lower income earners.  Property, shares, bonds and fixed interest can be counted as income investing.

High yield property tend to be cheaper, in more regional areas.  Some can be extremely volatile, especially in one industry towns. 

Everyone was jumping into mining town properties a few years back, encouraged by incredibly high returns from extortionate rents.  With the downturn in mining, these properties often lost half their value and the tenant pool dried up.

A carefully selected income property with carefully screened tenants can produce an income stream that increases with inflation. 

Shares brought for income fall into the “Dividend investing” category.  Certain companies are expected to pay consistent dividends, others focus on capital growth. 

The idea with share income investing is that dividends gradually increase over the years.

Bonds are often included in retiree’s portfolios, due to lower volatility and predictable income.  They are expected to provide a lower return long-term than shares, but more than cash.  Many investors like to transition more into bonds as they age, and capital protection becomes a higher priority than growth.

– Capital Growth vs Income Investing: Timing

Capital growth has the potential to create greater income eventually, but needs a longer time frame. Without enough time, investors can end up “Asset rich, Cash poor”. 

Many investors will benefit from using both strategies, capital growth initially to build a large asset base, before pivoting towards income investing in later years. 

The capital growth experienced initially can be used to leverage into higher value income investments and grow income faster than a pure investing for income strategy. 

I found the book “Investopoly” by Stuart Wemyss* did a good job of explaining a broad strategy to combine growth and income investing efficiently.

How and Where to Invest Your Savings: Taxation Considerations

Take some time to consider your tax position.  Are you (+/- partner) high income earners, expecting to pay increasing tax as your incomes increase?  Is an adult in the household planning to give up work or earn minimally for several years?

Investments should not be made for tax reasons.  Decide on a broad strategy and investments first, then work out how to minimize tax.

Many investors have lost money through investments designed to reduce tax.  It is also illegal to avoid tax or make investment decisions based on taxation.

Dividends are taxed at your marginal rate.  Capital growth is tax free until sold – and discounted by 50% if owned for at least a year.

 Therefore, a tax paying investor may benefit from minimizing dividends paid in order to compound capital growth tax-free until retirement. 

Tax paid at 30% within the company on profits reinvested are more tax efficient than high income earners being paid dividends.

“Franking credits” mean that investors avoiding paying tax twice.  Tax is paid on profit within the company before the dividend is paid. 

A tax (imputation) credit is applied to the dividend so the investor only pays their marginal rate on that dividend.  This means a refund for those paying less than 30% tax, but still produces a tax bill (marginal rate – 30%) for higher income earners. 

Franking credits improve returns for those with a marginal rate less than 30%. 

For higher income earners, Australian Financial Investment Company and Whitefield allow “Dividend substitution” plans – where extra shares are awarded instead of dividends paid, resulting in no tax paid during accumulation period. 

How and Where to Invest Your Savings: Asset Allocation

There are 4 main asset classes – property (residential and commercial), shares, fixed interest (bonds) and cash.  As I said earlier, there is really no ideal asset allocation, but your age and risk tolerance should be carefully considered.  There are several Asset allocation calculators online – including at Bankrate and Smart Asset

I haven’t found one that includes direct property investments.  It’s easier to consider how much property you wish to own at retirement initially, and then work out asset allocations for the rest. 

This may be more aggressive for initial years and transition to a lower volatility portfolio as you near retirement.  It is important to have a written plan of how you plan to invest so that you re-balance your portfolio when your allocations get out of balance.

– Cash

Cash loses purchasing power over time, due to inflation. 

This is the least efficient way to accumulate wealth (ignoring debt!). 

Cash should, however, be kept in an account to cover 3-6 months of essential expenses in case of an emergency.  Self employed persons or those who feel their income is not secure will want to save 6-12 months. Check out my Up bank review to compare the features of Up bank, ME and ING to find the best option for you.  

Any more than this is an opportunity cost.  The cash component puts me off pre-mixed diversified portfolios such as VDCO.  Cash, for me at least, needs to be separate from the rest of my investments in my bank/offset and available immediately when required. 

A bank account will probably pay less than 2% interest, so offsetting this cash against your home mortgage is the ideal way to maximize your return tax free.

– Fixed interest

Term deposits (AKA Certificate of deposit) lock up your cash for a defined period of time, and return a set interest rate (currently extremely low).  I would consider buying a term deposit for if interest rates became incredibly high, but can’t see any benefit at current rates.

Bonds can be brought directly via the ASX, in a bond ETF such as Vanguard VGB or Ishare IAF.  You likely own some in your superannuation.  They have traditionally lower growth and volatility than shares, but higher interest than cash investments.  They are intended to provide a more stable income source, and to reduce risk and volatility. 

Investing in bonds means loaning your money for a fixed period and receiving fixed or “floating” (variable) interest (AKA coupons).  They vary in risk from government bonds (rated AAA) to higher risk bonds for companies or countries that are less credit worthy (rated down to D).  Asset allocation to bonds traditionally increased with age, to lower volatility of your portfolio. 

Prices can fluctuate with changes in interest rate, and market expectations of the same.  The ASX has got a great education module on investing in general, but has a good part about bonds.

As with shares, when choosing an investment you should read the prospectuses and compare costs including hidden costs using the Indirect cost ratio

Buy/Sell Spread – How much will you lose when buying and selling due to the difference in prices between the two

Liquidity – How many buyers are there? Will you be able to sell when you need to?

Yield – Is it fixed or floating? How does it compare with other bonds?

Risk – How Credit worthy are the bond issuers?  How confident can you be of getting your initial investment back?

– Property

It appeals to me to have property income to diversify retirement income. 

Watching from the sidelines as a resident doctor in 2008, I realised it would be extremely stressful to have the asset pool from which your only income originates (superannuation) to drop by 50%. 

It is often advised to have 3-5 years in cash saved in retirement in case of such downturns.  That cash can be offset against an investment mortgage at 3-8%.  This return should maintain it’s purchasing power far better than in a bank account earning 1-3%. 

Many property adviser groups encourage going 100% property.  Putting all your eggs in one basket is risky! The biggest issue with well selected property (to me) seems to be legislative risk.  It seems the rules of the game can change quickly and dramatically. 

The Property Couch is a podcast with tons of super valuable content.

– Shares/ Equities

Owning tiny portions of lots of businesses is a great way to build wealth.  Long-term returns have been around 8-9%.  No-one can realistically predict what future returns will be.

Many are scared by the volatility of the stock market.  The value of each share bounces around constantly, with extensive debate as to the causes of the changes and what will happen next.  50% or more of these predictions tend to be wrong!

Passive investing has been shown (particularly through Warren Buffet’s famous bet ) to produce superior results most of the time.  Even great stock pickers struggle to compensate for the fees they charge.  Paying an “assets under management” or management fee of 1% or more rarely leads to a better return than simply investing cheap and passively. 

Index funds or passive ETFs are a great way to start building a diversified portfolio.  Many will continue to use purely these passive investing strategies exclusively.  Others may choose to dabble in individual stocks once they have worked out a strategy they like. 

The ASX (Australian Stock exchange) only accounts for ~4% of the world’s equity markets.  Global asset exposure is an important factor in risk reduction and diversification.  Vanguard suggest an allocation between 50-96% global: Australian equities. 

PassiveinvestingAustralia suggests basing the percentage of your total net worth to correlate with percentage of overseas spending.  Stock spot have listed their top 10 global funds with details on funds and other factors to consider.

Where to Learn More About Share Investing

The ASX website has a great beginners guide to explaining the basics of stocks, bonds and more.  Passive Investing Australia is an incredible website with detailed articles taking you through all you need to know to start choosing investments.

If you don’t have the time and just want to get started, consider starting investing small amounts in a robo-adviser.  You can get started in around ten minutes, and it avoids endless procrastination.

Congratulations on reaching the end of this very long post!  Remember, the most important points are to set some goals and time line (vague is OK if you’re not sure), and START investing.  Good luck!   


Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

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How Do We Pay off Our Mortgage FAST?

We have just brought our first home!!! Do you have any tips on how to pay off a mortgage fast?

Tips before paying extra into your mortgage:

– Consider putting extra payments into an offset.

This will save you the same amount of interest but you maintain more control (bank can’t stop you withdrawing unlike in a redraw account).

It also means that if years down the track of you decide to rent your home out (perhaps when upgrading) you can tax deduct the interest payments on the loan you have left. If you’ve paid it down you cannot withdraw and tax deduct

– Consider opportunity cost. Your mortgage repayments will reduce in real terms (%of income) due to inflation so will not seem such a burden in 15 years. With interest rates at record lows, make sure you consider investing with your extra cash flow vs extra mortgage repayments

Regardless, you should aim to minimise debt to save interest

– Pay fortnightly instead monthly
– use an offset to store savings for other goals
– salary sacrifice into mortgage (saving on tax)
– pay a bit extra from the start (most powerful effect on total interest paid) perhaps pay as if interest rates were 1-2% higher as a buffer in case of rate changes
– if self employed consider timing income and tax deductible spending to optimise tax and keep money in your offset as long as possible
-when interest rates drop keep your payments the same
– with each payrise put some of the extra into your mortgage each pay

It always feels like slow progress to start, but you get the first 1/3 paid off soooo slowly it really starts to accelerate