The Australian Taxation Office (ATO) is supporting first-time share and Exchange Traded Funds (ETF) investors to lodge their tax returns and avoid errors that can delay tax refunds. First-time investors often misunderstand their tax obligations in relation to reporting capital gains from the sale of shares and income in the form of dividends and distributions.
Assistant Commissioner Tim Loh explained that the ATO is keenly aware that the growth of micro-investment platforms has helped a record number of new investors enter the market.
"Unfortunately, first-time investors often don't understand their taxation obligations, don't keep appropriate records and are more likely to make mistakes when lodging their tax returns."
The ATO receives data from the Australian Securities and Investments Commission (ASIC), brokers, exchanges, and share registries, on dividend payments and the purchase and sale of shares. For example, this tax time information on 5.8 million transactions will automatically be added to the tax returns of 612,000 taxpayers.
"While this data makes tax time much simpler, it is still important for investors to check that all their relevant data has been included," Mr Loh said.
Taxpayers are urged to check that all relevant data has been included in their tax return before lodging or make sure their registered tax agent has all the necessary information before lodging. Even the best registered tax agents can only work with the information they are given.
Micro-investment platforms and Exchange Traded Funds
Exchange Traded Funds (ETFs) are an increasingly popular investment option amongst millennials. Several micro-investing mobile platforms operate as managed investment funds that purchase ETFs. Investors then buy units in the ETF using the micro-investing app on their phones.
ETFs provide investors with a Standard Distribution Statement (SDS) that breaks down what they, or their registered tax agent, need to declare in their tax return. When an investor disposes of units, the SDS will show the capital gains or losses made from the sale of the units which also need to be included in tax returns.
Dividend/Distribution reinvestment
ETFs often provide unitholders with an option to reinvest their distribution. This means that instead of making a cash distribution to unitholders, the ETF distributes shares instead. Other circumstances can be more complicated, and taxpayers may want to seek advice from a registered tax agent. Generally speaking, taxpayers will typically need to declare distributions despite not withdrawing any money from their account.
"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," Mr Loh said.
Anything received through a dividend or distribution reinvestment plan is considered income and for tax purposes is treated in the same way as receiving cash.
'Paper losses'
Investors who sell shares will need to calculate their capital gain or loss and record it in their tax return.
It is important to note that capital losses only happen on the sale of the share. Investors cannot claim 'paper losses' on investments if the share price drops but they continue to own the share.
Investors who have realised a capital loss from the disposal of investments, such as shares, should be aware that capital losses can only be offset against capital gains and not other types of income. Investors who don't have a capital gain in the same income year to absorb the loss can declare the loss in their tax return and carry it forward to future years to offset against future capital gains.
"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," Mr Loh said.
"Our sophisticated data analytics are able to spot this, and we may apply penalties for investors that have intentionally done the wrong thing."
Keeping good records
"Keeping good records is the best way to ensure you are complying with your tax obligations," Mr Loh said.
"Taxes on share and ETF investments can be complex and poor record-keeping doesn't make it any easier. 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."
"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," Mr Loh said.
"Errors related to CGT or income from dividends and distributions, whether deliberate or accidental, will lead to amendments. You may need to repay some or all of a tax refund and penalties may apply," Mr Loh said.
Records you need to keep
- 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).
