Investing for passive income in Australia

From dividend-paying shares to fixed income and managed portfolios, there are clear, accessible ways for Australians to build and grow passive income streams. This guide outlines some of the most effective strategies and key tax considerations to help you strengthen your approach. 

What is passive income and why is it valued by investors? 

Passive income is money earned regularly with little to no ongoing effort. While it often requires an initial investment of time, money or resources, the goal is to create a system that generates income autonomously. For Australians, building passive income streams can offer several significant benefits: 

• Financial security: Passive income can provide a safety net, reducing reliance on a single income source and offering stability during downturns or career changes. 

• Early retirement: By supplementing or eventually replacing active income, passive streams can accelerate your journey towards early retirement or semi-retirement. 

• Lifestyle flexibility: With income flowing in without constant work, you gain the freedom to pursue hobbies, spend more time with family or travel. 

• Wealth accumulation: Reinvesting passive income can leverage the power of compounding, significantly accelerating wealth growth over time. 

• Inflation hedge: Diversified passive income streams can help maintain purchasing power against inflation, especially if they’re linked to assets that appreciate over time. 

It’s important to distinguish passive income from ‘get rich quick’ schemes. True passive income requires strategic planning, initial effort and, often, capital investment. It’s about building assets that work for you, rather than exchanging your time directly for money. 

Common passive income investment strategies for Australians 

Australia offers a diverse range of investment opportunities for generating passive income. Here are some of the most common and effective strategies: 

Dividend investing (shares and ETFs)

Dividend investing is a popular strategy where investors purchase shares in companies that regularly distribute a portion of their profits to shareholders in the form of dividends. For Australian investors, dividend income from Australian companies often comes with franking credits, which can reduce the tax you pay. 

• Australian shares: Investing directly in dividend-paying Australian companies listed on the ASX can provide a steady stream of income. Companies with a strong track record of consistent dividend payments are often sought after by passive income investors. 

• Exchange Traded Funds (ETFs): Dividend-focused ETFs or income-generating ETFs pool money from many investors to invest in a diversified portfolio of dividend-paying stocks or other income-producing assets. This offers diversification and can be a simpler way to gain exposure to dividend income without having to research individual companies. 

Fixed income and cash investments

Fixed income investments provide regular interest payments over a set period. While generally offering lower returns than shares or property, they can provide a stable and predictable income stream. 

• Term deposits: Offered by banks, term deposits involve locking away a sum of money for a fixed period at a guaranteed interest rate. They tend to be  ow risk and provide predictable income. 

• Bonds: Investing in government or corporate bonds means lending money to an entity in exchange for regular interest payments and the return of your principal at maturity. Bond ETFs can provide diversified exposure to a range of bonds. 

High-yield savings accounts

While not strictly an investment, high-yield savings accounts generally offer a higher interest rate than standard savings accounts, providing a low risk way to earn passive income on your cash savings. These are suitable for emergency funds or short-term goals. 

Australian tax considerations for passive income 

Understanding the Australian tax landscape is crucial when investing for passive income. The way your passive income is taxed can significantly impact your net returns. Here are some key considerations: 

Income tax 

All passive income, whether from dividends, rent or interest, is generally subject to income tax at your marginal tax rate. It’s important to keep accurate records of all income and expenses related to your investments. 

Franking credits 

One unique advantage for Australian investors is franking credits. When Australian companies pay dividends, they often pay tax on their profits before distributing them to shareholders. Franking credits represent the tax already paid by the company. If you receive a franked dividend, you can use these credits to offset your own income tax liability and, in some cases, receive a tax refund if the franking credits exceed your tax payable. 

Capital Gains Tax (CGT) 

While passive income focuses on regular distributions, many investments also have the potential for capital growth. If you sell an investment asset (like shares or property) for more than you paid for it, you may be subject to CGT. However, if you hold the asset for more than 12 months, you are generally eligible for a 50% CGT discount, meaning only half of the capital gain is subject to tax. 

Superannuation 

Investing for passive income within a super fund can offer significant tax advantages, given earnings are taxed at just 15% and withdrawals could be tax-free in retirement. Dividend-paying shares and income-focused ETFs can be especially effective here. 

It is always advisable to consult with a qualified financial advisor or tax professional to understand your specific tax obligations and optimise your passive income strategy in line with Australian tax laws. Betashares is not a tax adviser and this information should not be construed as tax advice.