Investing in shares is a great way to make your money work for you — by passively building your net wealth and making additional income from dividends and capital gains. But the income that you make from your investments is still considered taxable by the Australian Tax Office, and you’ll be required to pay tax on the earnings that you make.
Taxable income includes things such as wages, self-employment income, business profits, rent from investment property, interest – and yep, even income received from investments like dividends, capital gains on assets, and other distributions.
A dividend is what is paid out when a company distributes its earned profits to its shareholders. The rate or amount of dividends to be paid is generally decided by the company’s board of directors and is usually paid out quarterly – but every company is different. Paying dividends is the company’s way of saying ‘thank you’ or rewarding shareholders for investing in their business.
The way that your dividends are taxed depends on a few things:
– your residency status in Australia
– your tax bracket (so all of your other taxable income comes into play here as well)
– and whether or not the dividends are franked or unfranked
The tax rate on dividends usually falls between 20-30%, depending on the above circumstances. But, Australian residents are taxed under a system called imputation.
Dividend imputation is a system that eliminates the problem of company profits being taxed twice.
If a company pays tax on the income when it is paid out, and then the payment is received by a shareholder who also pays tax on the same income – this is where double taxation happens to dividends.
To avoid this, Australian companies are allowed to issue what is known as franked dividends to its shareholders – which are dividends issued from after-tax profit. So the shareholder receives their dividend, and a franking credit. These franking credits represent the fact that the company has already paid tax on that income.
Dividends can either be fully franked, partly franked, or unfranked. A partly franked dividend means that only some of the tax has been paid on it, and that the shareholder will hold the responsibility to pay the remainder.
Unfranked dividends indicate that no tax has been paid on them – so you will need to take these into account while lodging your tax returns, and pay attention to what the franking status of your dividends are.
If you receive an excess of franking credits, you may be even able to claim a tax refund on them, as you will have exceeded the tax you had to pay. Most of this information is tracked and auto-filled by the company into the ATO—but you should always double check your own numbers against the auto-fill and keep all relevant records should something be off.
I want to know more about US taxes abroad
Capital Gains Tax on Shares
Capital gains tax (CGT) is the tax that you pay on profits you’ve received from selling assets such as shares. Capital gains are calculated from any net gain in income you have made on an asset – usually produced by buying low and selling high.
For example, if you bought $1000 worth of shares, and sold them for $3000 – you’ve made a net gain of $2000. This gain must be added and accounted for when you declare your taxable income. This tax not only applies to sold shares, but also other investments such as property or cryptocurrency.
You will have to pay tax on any of these gains at the same rate as your individual income tax rate.
CGT does not apply to dividends, as these are taxed as ordinary income. Nor does it apply to profits from shares if you are in the business of share trading, as this will be taxed as ordinary business income rather than capital gains.
You will need to keep good records of your shares and be able to identify:
– which shares you’ve sold
– when you acquired them
– when you sold them
– purchase price
– sale price
– commissions paid to brokers when you buy or sell
Most of these records will be provided to you by the company or your stockbroker. But it’s important that you keep a close eye on them, and make sure that all the details are up to date and correct.
The Australian government holds an interest in making sure that you hold your assets for an extended period of time, because of this you may be able to reduce your CGT by 50% if you’ve owned the asset for at least a year (and if you’re an Australian resident for tax purposes).
You can also lower the amount of CGT you must pay by declaring any capital losses you have had. A capital loss is the opposite of a capital gain – so if you invested the same $1000 into shares, and only sold them for $500, your net loss would be $500.
You can then use this loss to offset any gains you made and reduce the amount of CGT you’ll be required to pay. Though, keep in mind that this loss cannot be used to reduce any other income you made, such as your wages.
But what about if your investment has increased, but you haven’t sold it or done anything further with it? There are certain advantages to letting your investments sit – a big one being, the ATO doesn’t tax unrealised gains. You’re only subject to capital gains tax when the investment is sold.
While the ATO pre-fills a lot of information, it does not know about profits made from things like capital gains, cryptocurrency, or sole trader profits. If this information is missing, you will need to refer to your own records and enter it yourself. This is why it’s important to keep track of your investments and make a habit of good record-keeping to stay out of trouble with the ATO.
Investments and shares can make tax obligations a little more complicated than a standard tax return, especially if you’re dealing with a large amount of money or multiple investments and moving parts. An accountant or tax professional will be able to help you understand these things a bit better, and also help you make calculated decisions that will be the most beneficial for your financial future.