Tax tips for share investors
Tax tips for share investors
Apr 27, 2016
If you have been buying and selling shares, either as a regular or occasional share trader or as a long term investor, there’re number of factors to include in your tax return. In this article we discuss a few tips on what an individual with share investments need to do to prepare for coming tax time.
1. Records of your buys and sells
Buys and sells of shares are used to calculate any capital gains or losses. A properly recorded information, along with buy and sell statements for the financial year that you have traded, are required for your Accountant to apply the right treatments for your situation. You can use a comprehensive spreadsheet or use an automated share portfolio management software to record all share transactions.
2. Records of dividends
As a shareholder, you will receive dividends from the companies that you have invested on shares. What you need to provide to your accountant are the amount of the dividend, whether it’s foreign or Australian sourced, franked and unfranked amounts and franking credits. Usually, taxpayers submit all the dividend statements they’ve received throughout the financial year to their accountant go through and compile on to their tax return or they provide a comprehensive excel spreadsheet that includes all information.
A common question asked by many of our clients who keeps their own spreadsheet, is whether the dividend income is taxed when it is declared or when it is received. In order to record accurate information correctly on your spreadsheet, it is important to know that dividend income is taxed in the time that is received rather than the time it was declared.
3. Dividend reinvestments
Dividends received under a dividend reinvestment plan are still taxable in the relevant tax year, even though you haven’t received actual cash payments. This is because under dividend reinvestment plans, shareholders can choose to use their dividend to acquire additional shares in the company instead of receiving a cash payment. For capital gains tax (CGT) purposes, if you participate in a dividend reinvestment plan you are treated as if you had received a cash dividend and then used the cash to buy additional shares.
Your accountant would need your dividend advices/statements or if it’s through a share portfolio broker, you can download the income/dividend summary report for the given financial year to ensure that all dividends are included in your tax return.
4. Capital gains and losses when disposing of shares
You are likely to make either a capital gain or capital loss when you dispose of your shares. Your capital gain is the difference between your cost base (costs of ownership) and your capital proceeds (what you receive when you sell your shares). Therefore, it is important for you to keep track of cost base of the shares when you obtain them. Even if you didn't pay anything for your shares, you should find out the market value at the time you obtain them - otherwise, you may pay more tax than necessary when you dispose of them.
5. Getting the right advice - What your accountant can do for you
Accountants can provide you with advice in maintaining an investment register for your shares or your accountant can maintain the investment register for you. Usually, for larger share portfolios, accountant might be the one maintaining the investment register for a client.
If you have maintained your own investment register, then your accountant may need to see your investment register along with all the source documents when preparing your tax return. Summarise all transactions and presenting only required information to your accountant can significantly minimise your accounting cost.
Most taxpayers are aware that their income through share investments are taxed but they lack understanding on what direct expenses they can claim and what expenses you can include in the cost base of shares. Meeting with your accountant to receive right advice can help you to realize significant tax savings.
Getting the right tax advice from your accountant before taking any action on your share investments is crucial and prevents you from paying more tax. For example, whether you’d be eligible for 50% capital gains discount, whether you qualify as an investor or a trader makes a big difference in how you will be taxed.
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