When you invest in shares, you earn additional income through dividends and share price appreciation. As both are a form of income, you must pay tax on these earnings.
If you are one of the many Australian investors who have begun stock/share investing and trading, you should know the tax treatment of dividends and capital gains when filing your tax return.
1. How Is Investment Income Taxed?
You need to include the following types of investment income in your income tax return:
Managed funds distributions
Capital gains from stocks, real estate, and cryptocurrencies
2. Do You Pay Tax On Shares In Australia?
Yes. However, the tax rules for different types of share income earned are different:
Dividends: The portion of a company’s profit distributed among its shareholders.
Capital Gains: When you sell a share at a higher price than the buying price to earn a profit.
Distributions: Similar to dividends, you receive them from exchange-traded funds instead of companies.
There are different parts of the tax return to report each income type. Combining all these income sources gives you the total income or assessable income.
To know how to calculate tax on shares sold, you have to add the above income types to arrive at a total taxable income. For example, if you have received a salary of $50,000 and made a profit of $2,000 from stock trading, your total taxable income will be $52,000 for that financial year.
3. What Are Capital Gains?
Shares, like other investment properties, are subjected to tax in Australia.
The net gain is added to your taxable income if you sell your shares for a higher price than you paid. You must declare it as a “Capital Gain” on your tax return.
One must know that there is no capital gains tax rate in Australia. So, your capital gains add to your other income, and you have to pay the tax at your standard rate.
4. How Much Is Capital Gains Tax In Australia?
Your marginal tax rate determines the amount of capital gains tax you pay on investment income. In the case of joint stockholders, the tax is divided as per the stock’s interest, usually 50% each.
The marginal tax rate in the 2022 financial year is as follows:
|Taxable Income||Tax On This Income|
0 - $18,200
|$18,201 - $45,000||19 cents for each $1 over $18,200|
|$45,001 - $120,000||$5,092 plus 32.5 cents for each $1 over $45,000|
|$120,001 - $180,000||$29,467 plus 37 cents for each $1 over $120,000|
|$180,001 and over||$51,667 plus 45 cents for each $1 over $180,000|
5. What Are Capital Losses?
It is the opposite of capital gains, where you sell your shares for less than the buying price. You can claim them on your return to offset capital gains, excluding income earned as wages or interest.
You can carry capital losses to offset capital gains in future financial years if you have no capital gains to compensate them in a specific year.
6. What Is A Capital Gains Discount?
If you sell your shares at a profit after keeping them for at least a year, you get a 50% discount on payable capital gains tax. In other words, you report half of the net gain on the tax return.
7. Capital Gains Tax Exemptions And Deductions
|Cost Or Receipt||Share Investor||Share Trader|
Profit from the sale of shares
Subject to capital gains tax
Assessable as ordinary income
|Loss from the sale of shares||Used to offset capital gains or carried forward to offset future capital gains
It cannot be used to offset income from other sources
|Deductible against income|
|Dividends and similar receipts||Included in assessable income||Included in assessable income|
|Purchase price of shares||Taken into account in calculating a capital gain or loss when shares are sold||Deductible in the year incurred|
|Transaction costs of buying or selling shares||Taken into account in calculating a capital gain or loss when shares are sold||Deductible in the year incurred|
|Costs (such as interest on borrowed money) incurred in earning dividend income from shares.||Deductible in the year incurred||Deductible in the year incurred|
|Share Traders||Share Investors|
Money from the sale of shares and share dividends are included in assessable income.
You can’t claim the purchase price of shares as a tax deduction.
|However, you can claim the costs of buying and selling shares as a tax deduction.||Capital losses gets subtracted from capital gains.|
|Share traders can claim the costs of items such as computers, as they are necessary for making trades and keeping records.
You can also claim depreciation on items costing more than $300.
|Any net profit is subject to CGT.
You can claim share investment tax deductions on prepayment expenses such as Internet fees, seminars, or subscriptions up to 12 months in advance.
8. Do I Need To Do A Tax Return?
According to ATO, Australian investors who earn over the tax-free threshold, i.e., $18,200, must lodge a tax return. According to the Australian dividend tax for foreign investors, foreign residents that have earned over $1 in Australia need to do a tax return.
9. How To Pay Tax On Shares In Australia?
You must file your tax return for stocks as part of your usual income tax return after 30 June.
While filing your yearly tax return, you must mention any capital gains you have made on trading shares in the financial year. The Australian Tax Office already adds your dividend to your taxable income.
When the fiscal year ends, your stock broker or trading platform sends you an income tax statement with the profits earned. You must include this figure in your report while lodging a return.
If you have accounts with multiple brokers, you should calculate combined capital gains across all platforms and report them in your tax return.
10. Do I Have To Declare Shares On My Tax Return in Australia?
Yes. You will find different tax return sections for other income sources, such as dividends, ETF distributions, capital gains, franking credits, and foreign income.
Before filing your tax return, keep the records of purchases, sales transactions, and income earned from your stock portfolio as dividends and distributions.
Here is a checklist of documents you need to file the return:
Contract notes from your broker that shows your records of sales and purchases
Records of any dividend reinvestments
Annual tax documents for ETFs or property trusts
Income received from the investment as distribution statements, dividend statements, and rental payment receipts.
Payment receipts for the expenses you paid to manage, maintain, or improve the investment.
Keep the above records for five years after including the capital gain/loss or income in your tax return. When you declare your tax file number (TFN) to your broker, the dividends and distributions come prepopulated on your tax return.
11. Does The ATO Know When You Sell Shares?
Yes. The ATO evaluates the nature of your trading plan and activities, such as how often you trade and why you make specific trade decisions, and examine your potential investments.
The nature and purpose of share trading activities help ATO determine whether it should consider your share trading as business income for tax purposes.
12. Do You Get Taxed On Dividends?
Dividends are categorized into franked and unfranked. In franked dividends, the company distributes the dividend after deducting tax as per the Australian company tax rate of 30%.
A shareholder can claim credit as 'franking credit' while calculating their tax on investments liability. Such tax deduction at source doesn't happen in the case of unfranked dividends.
13. Do I Get Taxed For Dividends Even If I Reinvest It?
Shareholders usually reinvest their dividends to purchase more shares and grow their wealth. In such a case, they are still liable to pay tax on such dividends.
14. How Can I Legally Invest To Avoid Taxes?
Note that the ATO doesn't tax unrealized gains. It implies that you have to pay tax only on the investment you sell. It could be advantageous for long-term share investors who keep their positions for several years.
The unrealized capital gains tax on shares held for 10 years or more allows for faster compounding of returns.
15. How To Pay Tax On US Shares?
Like Australian shares, capital gains tax (profits minus losses) gets calculated instantly when you purchase and sell US stocks, not when converting your currency from USD to AUD.
For example, if you bought US$5,00 of Apple shares and then sold them for US$5,00 after some months, your capital gains may show as 0 USD but may appear as either profit or loss in AUD.
16. How Long Do You Have To Hold Stock To Avoid Tax?
Profits are taxable once when you sell your shares. If you sell before the end of the financial year, i.e., 30 June, whatever profits you earn will be added to your taxable income in this financial year.
However, if you sell in the next financial year, i.e., after 30 June, that income will get included in the next tax return. This way, you can avoid paying taxes on your stock's investment.
17. How Much Tax Do I Have To Pay On Shares?
The tax you pay on your shares is determined based on the tax bracket you fall into and for how long you hold your stocks before selling them.
If you buy and sell your shares within the same financial year, your total profits are considered when calculating your taxable income. If you sell your shares in the next year, you are only taxed 50% of the profits earned.
The shares tax calculator lets you calculate how much capital gains you have to pay on selling your shares.
18. How Much Tax Do You Pay On Shares After A Year?
However, if you hold shares for over 12 months before selling, you get a capital tax discount where you get only taxed on 50% of the profits you earned from selling those shares.
19. Are Dividends Taxed Twice?
Yes. The dividends that a company pays are taxed twice.
The first taxation happens at the company's year-end when it has to pay taxes on its earnings.
The second taxation occurs when the shareholders get the dividends from the company's after-tax earnings.
The stockholders pay taxes twice, first as company owners that bring in earnings and then as individuals who pay taxes on their dividend earnings.
Investors must consider the taxes payable on their stocks while making an investment decision, as they could affect overall returns. As tax treatment for dividend and capital gains taxes differ, ensure you understand this to calculate your tax liabilities correctly.
Also, be informed of your eligible deductions associated with purchasing, selling, and keeping shares, such as management fees and the interest paid on borrowings for share investment.
Finally, as each individual's situation is different, it is good to check with your financial advisor for specific advice concerning your circumstances.
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