5 key tax time 2021 questions for investors
Not sure what the rules are for shares or franking credits? Here are the details.
Whether you're a seasoned investor or you've only recently started to dabble in the share market, chances are you'll have one of these questions when filling out your tax return.
Here are 5 of the most common questions around investing in shares and tax answered.
Do I pay tax on my shares?
You need to pay tax on any income or profit you've made from shares. If your shares have gone up in value, but you haven't sold any, you don't need to declare this as it's not a realised gain (it's just on paper, sorry!). But if you've received dividends in the past financial year, these need to be added to your total taxable income.
The ATO will have a record of your dividends and will pre-fill these in for you. If you hold Australian shares with fully-franked dividends, you'll be entitled to a credit for the tax that the company has already paid on your dividend (more on this below!). Again, this discount will have already been applied by the ATO, so there's no action you need to take with this.
If you hold shares but you haven't received any dividends, and you haven't sold any of your shares in the past year, then there's no action for you to take at tax time.
What are franking credits?
Franking credits were introduced to ensure profits on Australian shares weren't being taxed twice. Because the company has already paid tax on its profits at the company tax rate of 30%, there's no need for investors to pay this tax again when they receive the money in the form of a dividend. To avoid this, a franking credit is applied to your dividend that reduces your tax liability by the amount that the company has already paid in tax.
If you don't owe any income tax, and therefore don't have a tax bill to reduce with a franking credit, you could be eligible for a cash refund instead. This is known as an imputation credit, and it only applies to you if you don't have an income tax bill for the financial year (for example if you're retired or if you earn below the tax threshold).
What happens if I've made a profit from my shares?
The ATO considers profits from investment to be income. This means that if you've sold any shares in the past financial year (before 30 June) and made a profit, you need to pay tax on your profit. The amount of tax you'll pay depends on your total taxable income and which tax bracket you fall into.
However, if you held the shares for longer than 12 months before selling, then you'll get a discount and will only pay tax on 50% of the profit amount. For example, let's say you sold some shares and made a profit of $1,000. If you'd owned the shares for more than a year, you'll only need to pay tax on half of that profit (i.e. $500).
What happens if I've made a loss?
If you sold some shares before 30 June for a loss (that is, you sold them for less than what you paid for them), you don't have to pay tax on this. This is because only profits are added to your taxable income.
However, if you've made a loss on some shares but also made a profit on others, you can use the loss to offset the profit you made at tax time. As an example, let's say you sold some shares for a $1,000 profit but you also made a $200 loss on some others. You can use your $200 loss to offset your $1,000 gain and add $800 to your taxable income instead.
Can I claim the cost of investing?
You can't submit a direct tax deduction for things like brokerage fees or investment platform fees that you might need to pay when securing your shares. However, if you sell your shares you can deduct these costs from your profit so you're only required to pay capital gains tax on your profit, not your cost base.
If you're trying to decide whether you should use an agent or not, our comparison of using a tax agent vs lodging online yourself may help you choose. And if you want more tax tips on what you can claim, there's a full list of extra tax deductions in our guide.
