DIY funds get a little good news

Suddenly it seems that DIY funds are under attack from all sides. There is a looming threat over franked dividends from the Ken Henry tax review, and a general tightening of access to Commonwealth benefits.

But it's not all one-way traffic. The May budget is expected to include an announcement that the Commonwealth will be issuing inflation-linked bonds to investors, a measure that is sure to be popular. In the meantime, buried in recent announcements from Treasurer Wayne Swan, is some potential future tax relief for DIY super operators.

The change relates to the pay as you go (PAYG) tax system, which were announced by the Treasurer in a media release.

The overarching detail of this announcement is that the 1.5 million pay as you go taxpayers - including the majority of DIY fund operators with more than $50,000 in annual income - who pay quarterly instalments that are usually adjusted by gross domestic product each year will have their instalments only increased by 2% next financial year, rather than the previously used figure of 9%.

The PAYG system is applied to people earning money outside "normal" employment (where income tax is deducted before a person's income is paid). This is primarily people (or companies or superannuation funds) earning investment or business income. An overall estimate of your annual tax liability is made, and the PAYG instalments are collected toward this expected tax liability.

At the end of the year the final tax amount is calculated and an amount is either owing or refunded, depending on how much tax you have paid through the year and your final tax amount.

If your DIY fund does pay tax quarterly through the PAYG system, it is important to note that there is no change to the final amount of tax that is will be paid, just a reduction in how much money will be collected on a quarterly basis for the instalments.

There is no change to the end amount of tax paid. However, for investors who "benefit" from this rule change, at least it will decrease your ongoing tax payments. To put it another way, you get to keep assets and cash in your DIY fund for longer, allowing the possibility that market values may improve before you are hit with another tax bill.

Of course, there might be many investors who are saying that if cash rates have halved from 12 months ago, and share dividends have been cut and look like being cut further, is their really any likelihood that their investment income will increase by 2% over the course of the 2009-10 financial year?

In the current environment that is a very fair question, and one that is not addressed by this current announcement.