If you’re building up an investment portfolio, it is essential to fully understand your tax position, both in terms of how your profits will be taxed and what deductions you can claim.
Here’s my list of the top tax tips you need to be aware of.
Income
Generally speaking, the sale of investments including shares (which are held for long-term gain rather than short-term profit) are taxed as capital gains (with access to the 50 per cent discount where the investments are retained for longer than 12 months).
The income earned from those assets, such as interest or dividends, is taxed as ordinary income.
If you’re regarded as a share trader rather than an investor (i.e. your business or occupation is buying/selling shares rather than passively holding them for future gain), profits and losses arising from the sale of shares is treated as income rather than capital. This means that losses from your share trading can be offset against your other income in the year. The downside is that profits are not taxed as capital gains, so you don’t get the 50 per cent discount. It can be difficult to persuade the ATO that you are a share trader rather than an investor. They would expect to see a viable business plan combined with share trades which are regular, high in volume and undertaken with a view to short-term profit on each share.
Deductions
You can claim various deductions for costs related to earning your investment income including:
- Management fees or retainers paid to a financial planner (but not the initial costs of drawing up an investment plan);
- Bank charges for bank accounts to manage your investment income and expenses;
- Borrowing costs incurred in arranging finance, such as legal expenses, loan establishment fees, etc. (deductible over five years or the term of the loan, whichever is shorter, unless the amount is $100 or less in which case it’s immediately deductible);
- Interest on borrowed funds where you have financed your investment portfolio using those funds;
- The cost of running a home office to manage your investments (including telephone, computer and internet expenses);
- The cost of investment-related journals and subscriptions;
- Costs of obtaining tax advice;
- Travel costs associated with your investments, such as trips to see your financial planner or stockbroker, or the cost of attending AGMs; and
- You can also claim depreciation on any assets used to manage your portfolio, such as computers, laptops, etc. with the deduction apportioned between private/domestic use and use in your investment activity. Immediate deductions can be claimed for depreciating assets that cost less than $300.
Dividend reinvestment plans
Shareholders are often given the option of reinvesting their dividends into more shares. Be careful though, because the dividend is still included in your assessable income for tax purposes, even though you never actually saw any cash.
Franking credit refunds
If your taxable income is less than $18,200 and you receive franked dividends, you can make a claim to get a refund of the franking credits paid on the dividends you received.
Foreign income
If you own foreign investment assets, such as shares, the income from those assets is still taxable in Australia. You may be entitled to a credit against your Australian tax for any foreign tax paid.
Losses
Current year income losses arising from the negative gearing of investments (i.e. where your financing costs exceed the return on your investments) can be offset against current year income.
As you head towards the end of the year, it is worthwhile reviewing your portfolio for shares sitting at a loss. If you’ve sold shares at a profit during the year and are facing a capital gains tax bill, it’s worth considering some of the loss-making shares to generate capital losses that can offset the capital gain.
Mark Chapman, director of tax communications, H&R Block
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