ATO puts new investors on notice
New investors should be on notice as they prepare to lodge their first tax return since investing, the tax office has warned.
ATO Assistant Commissioner Tim Loh has called on first-time investors to keep detailed records and understand the tax implications of their trades in order to avoid penalties.
Exchange traded funds (ETFs)
Providers of ETFs, which are gaining popularity among novice investors, will provide their unit holders with a Standard Distribution Statement (SDS).
When the investor sells units, the SDS will reflect the capital gains or losses made from the sale of the units, and this needs to be included in the tax return.
ETFs often distribute unit holders with dividend distributions, which can be reinvested or withdrawn for cash.
Either way, the dividends are still considered income and therefore need to be declared to the ATO.
"Most people recognise that they must pay tax on any money earned from selling shares. But many don't realise that tax also applies to dividends and distributions, even if they are automatically reinvested into a reinvestment plan," says Loh.
Sales of shares will incur either a capital gain or loss, and this needs to be declared to the ATO.
Capital losses can be offset against the capital gains you may make on other investments. Undeclared capital losses in one year can also be carried over as a capital gains offset in the next financial year.
But remember, capital losses can only be incurred with the sale of shares. A fall in share prices alone - i.e. a decrease in its capital value - is not a realised capital loss.
"Each year we see some enterprising entrepreneurs trying to offset their capital losses against income tax applied to other income, such as salary and wages. Others attempt to offset a 'paper loss' against actual income," says Loh.
"Our sophisticated data analytics are able to spot this and we may apply penalties for investors that have intentionally done the wrong thing."
Above all else, investors need to keep records of their investments.
"Keeping good records, including dates, prices, commissions, and details of taxable events such as share splits, share consolidations, mergers, and demergers is essential to avoiding trouble at tax time," says Loh.
"We want to make tax as easy as possible and using data from share trading platforms and the SDS from ETFs is a vital way that we help taxpayers avoid simple mistakes."
Records to keep include:
- the date of purchase/reinvestment
- the purchase amount/value
- details of any non-assessable payments to you
- the date and amount of any calls (if shares were partly paid)
- the date of sale and sale price (if you sell them)
- any brokerage costs or commissions paid to brokers when you buy or sell
- details of events such as share splits, share consolidations, returns of capital, takeovers, mergers, demergers and bonus share issues
- details of capital losses made in previous years - you may be able to offset these losses against future capital gains
- dividend or managed investment distribution statements (Standard Distribution Statements).
Get stories like this in our newsletters.