How to lodge your tax return when you invest in shares

If you're a sharemarket investor it's important to include returns from shares in your annual tax return. Shares can deliver two types of returns - ongoing dividends, plus capital gains when you sell shares for a profit. These are each recorded in separate areas of your tax return.

Dividend income

Our system of dividend imputation lets shareholders claim a tax credit for a slice of the company tax paid on profits that dividends were distributed from. So before you get started, gather the 'dividend notices' sent to you by the companies you invest in.

These notices will set out the value of the cash dividend you received plus any franking credits, which represent your share of the company tax paid.

When you complete your tax return, you need to 'gross up' the dividend to include franking credits. An example here will help.

Let's say Nicki invests in ABC Limited. Her dividend notice shows the 'franked amount' of her dividend was $700 - this is the amount she actually received. There is also a 'franking credit' of $300.

In her tax return, Nicki will include the following:

It may seem unfair that Nicki has to include dividends of $1,000 in her tax return when she was paid just $700. But when the Tax Office works out how much Nicki owes in tax, she will be credited for the $300 company tax paid by ABC Limited. If Nicki is a low income earner she could even receive that $300 as a tax refund.

Capital gains

Capital gains are only taxed at the point when shares are sold. So no matter how much your shares rise in value, you don't need to include the gains in your tax return until you sell them. As an added bonus, if you've held onto your shares for more than 12 months, you're entitled to claim a 50% discount on capital gains.

Profits on the sale of shares are recorded in the 'Capital gains' section of your tax return (you may need to use a 'supplementary section to show workings). Your broker's record of share trades or CHESS statements will help you work out how much you paid for shares and what you sold them for. Your broker's statements will also show the cost of brokerage, which can be included in the 'cost base' of shares sold.

Here's how to complete the details.

Let's say Phil invested $10,000 in XYZ Company shares in early 2018. In January 2020 he sold all the shares for $15,000. He paid $30 brokerage on each trade, so he can add $60 to the cost of shares traded. Phil hasn't made losses on any previous share sales.

Phil's tax return will show the following:

If you purchased multiple lots of shares in the same company over time, you may be able to use your CHESS holding statements to nominate which shares you sold. Or, the Tax Office accepts a 'first in, first out' basis where you treat the first shares you purchased as being the ones you sold first.

If you sold shares at a loss, it's still important to include the details in your tax return. Capital losses can only be offset against capital gains - not against your regular wage or salary income. However, you can carry capital losses over to subsequent tax returns to reduce the tax payable on any future capital gains.

If you have any doubts, always speak to your tax professional.

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