Recognising that first-time investors often misunderstand their tax obligations in relation to reporting capital gains and income, the Australian Taxation Office (ATO) has warned first-time share and exchange traded funds (ETF) investors that a range of simple mistakes can prolong the process.
“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,” said ATO assistant commissioner Tim Loh.
He explained that the ATO is keeping a close watch on around 612,000 taxpayers that have executed some 5.8 million transactions.
Noting that while the ATO has access to information from a range of sources, taxpayers still need to make sure all the relevant data has been included.
To help them do that, Mr Loh provided a list of things to watch out for, including:
‘Include capital gains or losses in your tax returns’
Exchange traded funds (ETFs) are an increasingly popular investment option among Millennials.
But Mr Loh cautioned that anyone who has invested in these, either directly or through a micro-investment platform, will need to reflect this on their tax return.
He explained that 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.
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, Mr Loh explained, 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.
Investors who sell shares will need to calculate their capital gain or loss and record it in their tax return.
According to Mr Loh, 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.
He explained that 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.”
Records you need to keep: