Investing in shares is a popular method of growing your wealth, however, there are tax obligations you need to be aware of to get an accurate sense of how much you’ll need to put aside for your investments.
When you own shares, you need to declare all your dividend income on your tax return. It is possible to claim tax deductions for certain expenses you pay to receive income from your shares. The deductions you are eligible for will depend on if you are carrying on a business of share trading or if you are an individual share investor, but they can include:
- Management fees: the payment of ongoing fees or retainers to investment advisers are tax-deductible.
- Borrowing expenses: the expenses of borrowing money for shares may be tax-deductible. This can include establishment fees, legal expenses and stamp duty on the loan.
- Interest: if you received a loan to buy shares, you can claim a deduction for the interest incurred on the loan if it is expected that assessable dividends will be derived from your shares.
- Travel expenses: if you need to travel for the sole purpose of working on your share investment, such as travelling to consult with a broker, you may be able to claim a deduction for the travel expenses incurred.
Individual share investors cannot claim a deduction for the cost of acquiring shares, such as costs for brokerage and stamp duty, however, they can claim deductions on the prepayment of expenses related to the shares such as internet fees or seminars.
Buying and selling shares can involve capital gains tax (CGT), depending on whether you make a capital gain or a capital loss on your shares. Your capital gains or loss is the difference between the price you paid for the shares and the price you sell them for. If you end up selling your shares for more than you paid for them, then you make a capital gain which may be taxed.
How much CGT you need to pay varies depending on:
- How long you’ve owned the shares for: if you have held the shares for more than 12 months, you can usually discount a capital gain by 50%.
- Your marginal tax rate: your capital gain will be added to your assessable income in your tax return and taxed as part of your income at your marginal tax rate.
- If you’ve also made any capital losses: only your net capital gain will be taxed with your assessable income, meaning that if you’ve also made capital losses then they will be subtracted from your capital gains. If you have more capital losses than gains, you are generally able to carry the capital loss forward and deduct it from any capital gains you make in future years.