With many ‘safe’ investments such as term deposits offering low interest rates, more people are turning to the share market in pursuit of higher returns. 

For new share investors this means understanding not only the risk profile of share investments, but also the different ways in which the returns on shares are taxed. 

Jane is one such investor. Looking for a combination of steady income and the potential for capital growth, she recently purchased a portfolio of shares in major companies with a good history of paying regular dividends. 

Soon she’ll begin to enjoy receiving dividends and she’s already following the performance of her shares via daily finance reports. But how will her investment income be taxed?

Dividends 

Each time Jane receives a dividend statement from a company, usually twice a year, she’ll see the cash amount of her dividend is made up of a franked amount and an unfranked amount. 

There will also be a franking credit – imputation credit – that represents tax already paid by the company. In her annual tax return, Jane must declare the cash dividend plus the franking credit. This total amount is then taxed at her marginal rate, but reduced by the value of the franking credit.

For example: BigBank Ltd, BBL, pays Jane a fully franked dividend of $70. The imputation credit is $30, and the unfranked amount is nil. Jane declares the full $100 on her annual tax return, and at her marginal rate of 39 per cent, including Medicare Levy, this creates a tax bill of $39. 

However, this is reduced by the franking credit – the tax already paid by BBL – so she only pays an additional $9 in tax.  

Capital gains

A capital gain will be realised if Jane sells any shares for more than she paid for them. If the shares have been held for less than 12 months Jane will need to declare the full profit in her annual tax return and it will be taxed at her marginal rate plus Medicare levy. 

If the shares have been held for more than 12 months, a 50 per cent discount applies to capital gains tax, so Jane only needs to declare half of her profit. 

If Jane sells any shares for a loss, it can be offset against current capital gains, or carried forward indefinitely and offset against future gains.

Alternative vehicles

In the example above Jane has invested in her own name and her portfolio will feel the full drag of being taxed at her marginal rate. 

More tax means less money available to generate a return. 

Jane could therefore consider investing via superannuation. Super funds in the accumulation phase have a tax rate of just 15 per cent, and the discounted tax rate on capital gains on assets owned for more than 12 months is 10 per cent. 

Of course, Jane would need to be happy to have her nest egg locked up in super until she meets a condition of release, potentially decades away. 

Unusual economic conditions are seeing more people invest in assets that they may be unfamiliar with. Success means understanding how these investments work, their specific risks, and the tax implications. 

Your licenced financial planner can help you identify your needs and design a plan of action to help you make the most of your investment dollars.   

• The information provided in this article is general in nature only and does not constitute personal financial advice. 

 

• A timely exercise for safe returns

Filling out your tax return gets easier if you wait an extra couple of weeks to lodge. 

By waiting until late July, most of your information from employers, banks, health funds and government agencies will be automatically pre-filled in your return for you. 

You will need to check the information is correct and add anything that is missing.

People who wait for pre-fill generally will not have their return held up in the system, and will not need to amend it when the information arrives.

Whether you work in an office, herd cattle on a farm, fix computers or mend broken bones – the Australian Taxation Office, ATO, has a range of tailored occupation guides that can help people work out what they can and cannot claim at tax time. 

There are three golden rules when it comes to claiming a deduction for a work-related expense: You must have spent the money yourself and were not reimbursed; it must directly relate to earning your income; and you must have a record, usually a receipt, to prove it.

The simplest of mistakes can hold up a tax return. 

To avoid a long wait, make sure your details up to date with the ATO – if you lodge using a different address, for example, the ATO will not be able to match it with your tax file number.

Make sure your bank details are in order so your funds reach your account and be sure to get your spelling right, because one wrong letter can hold up your return.

Tax is complicated. There’s no getting around it, so choose the easy road and stress less, whether that be lodging your return yourself using online help, or reaching out to a qualified tax agent.

The entire July 31, 2024 edition of The Weekly Advertiser is available online. READ IT HERE!