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Do I need to pay tax for shares or robo-advice?

Posted: 21 July 2020 12:14 pm
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Thousands of Australians will be reporting share profits in their tax return for the first time this year. Here's everything you need to know.

If you started investing in the stock market in the last year, you’ll be joining thousands of other lucky Australians grappling with capital gains tax (CGT) for the first time this tax season.

Since COVID-19 sent the stock market crashing, more than 4,000 new investors opened share trading accounts every day in Australia between February and April, according to the Australian Securities Investment Commission (ASIC).

During this time, many sought to take advantage of the volatility by trading multiple times in a week or even a day. ASIC data found investors were making one trade a day on average, compared to every few days as is the norm.

But what new investors may not realise is the number of times you trade in a year can impact your tax return. If you’re scratching your head over this new complication, here are a few tips before you lodge this year's statement.

How much tax do I pay on shares?

Unless you’re a professional trader, you need to pay capital gains tax on the profits you make from almost any type of investment in Australia up until 30 June.

That includes stocks, ETFs, forex, robo-advice and micro-investment apps such as Raiz and CommSec Pocket.

The amount of tax you pay is based on your usual marginal tax rate, which is dependent on your total taxable income. This is your salary plus profits from investments, minus any deductions.

Investment profits are only included once you cash in. So if you bought shares or invested in a robo-advice portfolio this year and didn't sell out, you won’t need to pay tax on them in FY19/20, even if share prices have gone up since you bought them.

Calculating profits

You only pay tax on profits after losses have been deducted. For example, say you bought 100 Afterpay (APT) shares at $10 each then sold them at a price of $20 – you’d have made a tidy profit of $1,000 (not including brokerage fees). But if in the same year you’d also bought 10 CBA shares at $90 and then sold them at $60, your losses would be $300.

If you’d made no other trades in the year, you’d need to pay capital gains tax on $700.

Meanwhile, any dividend payments you received through the year will have automatically been added to your income by the ATO and taxed at your marginal tax rate.

According to H&R Block's director of tax communications, Mark Chapman, there are other factors investors should consider when lodging their tax return.

"Make sure you get tax advice. In particular, you’ll need to understand whether you’re a share trader or a share investor because the tax treatment is very different," Chapman told Finder.

There are no black and white rules here, but share traders are generally defined by the ATO as those whose business activities revolve around trading.

"The key tax advantage for a trader is that losses can potentially be offset against other income," he said.

What benefits do investors get?

There's a tax secret you don’t usually find out about until your first season as an investor. If you hold onto your shares or ETFs for longer than 12 months, you’re eligible to get a 50% discount on the CGT you pay.

So, using the example above, if you’d bought APT and CBA and then sold them both over a year later (assuming the same prices), you'd need to pay tax on just $350 instead of $700.

"Make sure you claim all the deductions you are entitled to. You can claim various deductions for costs related to running your investment portfolio," said Chapman.

According to Chapman, some of these deductions you may be eligible for include:

  • Bank fees on accounts used to manage your investment income
  • Management fees paid to a financial planner
  • Interest on borrowed funds and related fees used to finance your investments
  • Travel costs associated with your investments, such as the cost of attending company general meetings (AGMs)
  • The costs to obtain tax advice
  • Depreciation on equipment used to manage your portfolio, such as laptops and desktop computers

If you've invested in dividend-paying stocks, you may also be eligible to receive franking credits – you can read more about that here.

To help the process, Chapman says you should keep a record of your share transactions and other expenses for at least five years. That includes dividend statements, buy and sell orders and any receipts.

Next steps

Whether you're trading shares through a broker, using a micro-investment app or investing with a robo-adviser, you should receive an end of financial year statement from each provider at around 30 June.

This will detail all buy and sell transactions, how much profit you've made, any dividends and total fees.

You'll need these statements when you lodge your tax return. If you're using a tax consultant, make sure you take all of the statements with you.

For more information on lodging a tax return as a share trader, head to our ATO guide.

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