Tax Tips For First-Time Investors

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Running an investment portfolio comes with its own tax responsibilities relating to interest, dividends, capital gains and rent-related payments. If you're new to the game, it can be a lot to take in. Here are some expert accounting tips to help you play by the rules and get the return you deserve.

The below information illustrates the various deductions for costs related to running investment portfolios.

Deductions

You can claim various deductions for costs related to running your investment portfolio including:

  • interest on borrowed funds where you have financed your investment portfolio using those funds
  • borrowing costs incurred in arranging finance, such as legal expenses, loan establishment fees, etc (deductible over five years or the term of the loan, whichever is shorter, unless the amount is $100 or less in which case its immediately deductible)
  • bank charges for bank accounts to manage your investment income and expenses management fees or retainers paid to a financial planner (but not the initial costs of drawing up an investment plan)
  • the cost of running a home office to manage your investments (including telephone, computer and internet expenses)
  • the cost of investment-related journals and subscriptions
  • costs of obtaining tax advice
  • travel costs associated with your investments, such as trips to see your financial planner or stockbroker, or the cost of attending AGMs

You can also claim depreciation on any assets used to manage your portfolio, such as computers, laptops, etc, with the deduction apportioned between private/domestic use and use in your investment activity. Immediate deductions can be claimed for depreciating assets that cost less than $300.

Income

Generally speaking, the sale of investments including shares (which are held for long term gain rather than short term profit) are taxed as capital gains (with access to the 50% discount where the investments are retained for longer than 12 months).

The income earned from those assets, such as interest or dividends, is taxed as ordinary income

Dividend reinvestment plans

Shareholders are often given the option of reinvesting their dividends into more shares. Be careful though, because the dividend is still included in your assessable income for tax purposes, even though you never actually saw any cash.

Franking credit refunds

If your taxable income is less than $18,200 and you receive franked dividends, you can make a claim to get a refund of the franking credits paid on the dividends you received. H&R Block can help you fill out the claim forms.

Foreign income

If you own foreign investment assets, such as shares, the income from those assets is still taxable in Australia. You may be entitled to a credit against your Australian tax for any foreign tax paid.

Losses

Current year income losses arising from the negative gearing of investment income can be offset against current year income.

If you’re regarded as a share trader rather than an investor (ie, your business or occupation is buying/selling shares rather than passively holding them for future gain), losses arising can also be offset against your other income in the year. The downside is that profits are not taxed as capital gains, so you don’t get the 50% discount. It can be difficult to persuade the ATO that you are a share trader rather than an investor.


Mark Chapman is the director of tax communications at H&R Block.


Comments

    Dividend reinvestment plans

    Are generally not a good idea.. Whilst it is a forced saving most people have crap records at best. So lets say you buy a share and go into a DRP for 10 years then sell the shares. There are now 22 pieces of paper you need to keep for the cost base of your shares and 22 separate CGT calculations for the sale of the shares.

    Its also harder for people to remember and track what that have made on the shares. Rather than I bought 1000 shares costing $3000 you have something like I have now $1321 shares costing $3000 plus all those bits of paper that I cant be bothered adding up and I think some of the paper might be under the lounge or slipped behind the fridge.

    DONT DO IT I TELL YOU .......

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