As we have just passed the end of financial year below, it is important to know what is taxable when investing in shares and what can be deducted. Please be advised that you should treat this information as a general guide only and we recommend that you speak to a tax specialist.
Dividends are considered income so they are taxed as such under the Australian tax system. However, as companies who issue these dividends may have already paid tax, shareholders are given franking credits on these dividends which have been paid. These franking credits can help reduce the tax payable for the shareholder. For a more comprehensive explanation see the following link https://fairmontequities.com/an-easy-guide-to-franking-credits/.
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 calculated to determine whether a capital loss or gain is made when the shares are disposed of.
Shareholders will be required to pay capital gains tax if they make a profit from selling shares. If shareholders have held the shares for more than 12 months, they may receive a capital gains tax discount of 50% on this gain which means they only need to declare 50% of their capital gain.
If a shareholder makes a capital loss, they can offset this against any capital gains they made in that financial year. If there is no capital gain that year, they can carry that capital loss over to the future years where they have a capital gain to offset. Please see the following link for further information on how capital gains is calculated: https://fairmontequities.com/tax-time-what-you-need-to-know-about-capital-gains-tax-and-shares/.
Brokerage cannot be used as a deduction for share investing. Shareholders can add brokerage expense to the cost base when they sell the shares to determine the capital gain or loss.
Gifts on shares
When a shareholder gives shares as gift to another person, the transaction is considered a sale at the market price on the day the shares was given as a gift.
When an individual inherits shares from the transfer from the deceased estate, that event is not considered a CGT (capital gains tax) event. The individual is only liable to pay when they sell the asset.
When a shareholder buys a company which then becomes delisted, they can use this capital loss and offset it with any capital gain the shareholder may have in that financial year.
Lauren Hua is a private client adviser at Fairmont Equities.
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