Need to declare income from investments

More and more Australians are investing as a means of creating wealth.  This has been made easier for first time investors with the advent of Exchange Traded Funds (EFT’s) and similar type products. 

While it is great to see Australians creating wealth and therefore needing less reliance on government support through financial independence, most are not aware of the tax laws surrounding these investments.

This particularly applies to long term investors and who’s investments may be subject to tax obligations relating to capital gains when it comes time to sell or will receive income in the current year through dividends (shares), interest (bonds, term deposits, banks) or distributions (EFT, managed funds) on which the investor will need to declare as income in the tax year.

One way of increasing wealth is through reinvesting the income earned on current investments through a dividend/distribution reinvestment plan where you physically don’t receive a dividend/distribution in the form of cash but rather through more shares/EFT’s instead.

But what many first-time investors don’t realise is that whether the dividend/distribution is received in cash or more shares/EFT’s, it is deemed income for tax purposes in the years it is received.

Furthermore, if your investment has increased in value over a period of time and you decide to draw down some of the gain to take a holiday, pay school fees, do an extension on the house etc, it may be subject to capital gains tax which is the difference between what you paid for the shares for example and what you sell them for, allowing for costs associated with the buying and selling of the shares.

A simple example might be as follows:  

Buy $5,000 in shares on 1 January 2020 and sell for $10,000 on 1 January 2022.  You are liable for capital gains and have access to the 50% general deduction for tax purposes and your current tax rate is 30% on your income.

In this case you would have a capital gain of $5,000 (difference between purchase price $5,000 and selling price $10,000).  As you are entitled to the 50% general deduction you would need to pay tax on $2,500 at your tax rate of 30% ($750).

Congratulations on building your own wealth through investments. It is suggested you work with your accountant or investment advisor to ensure you are maximising your returns.

The above comments are general in nature and should not be acted on without seeking professional advice.  Should you have any questions or want specific advice relation to your tax position contact Balanix Solutions on 3264 47783.