In practice, it is uncommon for an investor to simply choose capital gains or income, and typically allocate funds creating a blend between the two that suits their preferences and needs.
Capital gains arise when an asset, such as shares or property, is sold for a price higher than its purchase cost. This potential growth often appeals to those with higher risk tolerance and a preference for long-term investing, particularly for volatile investments. Meanwhile, income refers to the regular earnings from investments, such as dividends from shares, rent from properties or interest on deposits. This steady stream generally resonates with individuals seeking regular returns and lower volatility, allowing them to take advantage of the compounding effect by reinvesting income.
From a taxation viewpoint, Australia treats capital gains and income differently. While income is typically taxed at an individual’s marginal rate, capital gains can be eligible for a discount if the asset is held for more than a year, potentially reducing the tax payable.
