5 things you may not know about tax on shares

As tax time is quickly approaching, below are some tax topics that may not be obvious to share investors.

Tax on inherited shares

You only need to pay capital gains tax on shares if the inherited shares have been sold. If the deceased brought the shares before 20 September 1985, then the cost base is the market value of the asset on the day the person died. If the deceased brought the shares after 20 September 1985, then the cost base will be when the deceased originally bought the shares.

Tax on shares from dividend reinvestment plans

Each time you participate in a DRP, the amount you pay for the new shares will become part of the cost base if you were to ever sell the shares in the future. Hence it is important that the investor maintains good record keeping. This is so the cost base can be accurately be calculated to determine whether a capital loss or gain is made when the shares are disposed of.

Tax on shares as a gift

Unfortunately, when you give shares to someone, the person giving the shares is deemed to have sold it to the person they have given the shares on the day the gift transacted. Hence the person receiving the gift of shares will use the market value on the day the shares were given to them as the cost base.

If the market value of the shares at the time of transaction was higher than when the giver purchased the shares, then they will have to be subjected to capital gains tax. If the giver made a capital loss then they can use this to offset any capital gains.

Tax on international shares

Australia has tax treaties with most of our trading partners so this means investors will not be subjected to double taxation. The W8 BEN form allows foreigners to claim tax treaty benefits. If an investor receives a dividend from an international holding then they may be subjected to withholding tax that is approximately 15%. The tax treaty however allows investors a tax credit for the tax that they have already paid.

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Share trader or share investor

The tax treatment between a share investor and share trader is different and it is worth knowing the difference between the two. A share investor looks to trade to earn money from the dividends, a share trader looks to earn income from buying and selling shares.

Share investors can only offset a capital loss from capital gains from their shares. That is, they cannot offset this capital loss against their income. Investors can also utilise the 50% CGT discount when they sell shares they have held for more than 12 months, but a share trader cannot. However, a share trader can use proceeds from sale of stocks as assessable income and use share trading losses to offset other ordinary income. Traders can also use transaction costs as an allowable deduction.

To determine the difference between the two, the tax office will look at whether the taxpayer is carrying on a business of share trading by examining whether there is a purpose of making a profit from shares, how repetitive and regular trading occurs, whether the share trading is operated like a business (ie are there are good records being kept, a registered business name) and the amount of capital which is invested.

Lauren Hua is a private client adviser at Fairmont Equities.

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