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Tax Implications for Share Investments

August 14, 2024

Let's talk about Shares and how Tax Effects your Investments

Investing in shares can be a great way to grow your wealth and understanding the tax implications is pretty important. Whether you're dealing with dividends or capital gains, knowing how these are taxed can help you maximise tax deductions and achieve a maximum refund on your Income Tax Return. We'll look at the different revenue streams from shares and provide the number crunching for calculating gains, ensuring your Online Income Tax Return is optimised.

Investing in shares

Index of Contents

  1. Revenue Streams from Shares
  2. Dividends
    • Franked Dividends and Imputation Credits
    • Unfranked Dividends
  3. Capital Gains from Selling Shares
  4. Methodology for Calculating Gains
  5. Gotax Deduction Grabber App
  6. Conclusion

1. Revenue Streams from Shares

When investing in shares, you can earn income through two main avenues:

  • Dividends: Regular payments made by companies to shareholders.
  • Capital Gains: Profits realised when selling shares at a higher price than the purchase price.

2. Dividends

Dividends from shares come in two forms:

  • Franked Dividends: These include imputation credits (franking credits), representing the tax already paid by the company.
  • Unfranked Dividends: These dividends lack franking credits and are fully taxable.

Franked Dividends and Imputation Credits

Franked dividends help avoid double taxation. Here's how they work:

Example:

  • Company ABC declares a fully franked dividend of $70.
  • The company has already paid 30% tax on its profits, resulting in a franking credit of $30.
  • The grossed-up dividend (before company tax) is $100 ($70 dividend + $30 franking credit).

When you receive a franked dividend, include the grossed-up amount in your assessable income and claim the franking credit as a tax offset.

Calculation:

  • Grossed-up dividend: $100
  • Marginal tax rate: 37%
  • Tax on grossed-up dividend: $100 x 37% = $37
  • Less franking credit: $30
  • Net tax payable: $37 - $30 = $7

If your marginal tax rate is lower than the corporate tax rate, you may receive a refund for excess franking credits.

Unfranked Dividends

Unfranked dividends are fully taxable, without franking credits.

Example:

  • Company XYZ declares an unfranked dividend of $100.
  • You must include the $100 in your assessable income and pay tax at your marginal rate.

3. Capital Gains from Selling Shares

When you sell shares, the profit made is considered a capital gain and is subject to Capital Gains Tax (CGT). The gain is calculated as the difference between the sale price and the purchase price.

Example:

  • Purchase price: $5,000
  • Sale price: $8,000
  • Capital gain: $8,000 - $5,000 = $3,000

If you hold the shares for more than 12 months, you may be eligible for a 50% CGT discount.

Calculation with CGT Discount:

  • Capital gain: $3,000
  • 50% discount: $3,000 x 50% = $1,500
  • Taxable capital gain: $1,500

Include the taxable capital gain in your assessable income and pay tax at your marginal rate.

4. Methodology for Calculating Gains

To calculate the capital gain or loss when selling shares:

Step 1: Determine the Cost Base

The cost base includes the purchase price and any associated costs like brokerage fees.

Example:

  • Purchase price: $5,000
  • Brokerage fee: $50
  • Total cost base: $5,050

Step 2: Calculate the Sale Proceeds

The sale proceeds are the amount received from selling the shares, minus associated costs like brokerage fees.

Example:

  • Sale price: $8,000
  • Brokerage fee: $50
  • Total sale proceeds: $7,950

Step 3: Calculate the Capital Gain or Loss

Subtract the cost base from the sale proceeds.

Example:

  • Sale proceeds: $7,950
  • Cost base: $5,050
  • Capital gain: $7,950 - $5,050 = $2,900

Step 4: Apply the CGT Discount (if applicable)

If shares are held for more than 12 months, apply the 50% CGT discount.

Example:

  • Capital gain: $2,900
  • 50% discount: $2,900 x 50% = $1,450
  • Taxable capital gain: $1,450

Step 5: Report and Pay Tax

Include the taxable capital gain in your Income Tax Return and pay tax according to your marginal tax rate.

5. Gotax Deduction Grabber App

Simplify tax time with the Gotax Deduction Grabber App. This essential tool includes all the logbooks and tax expense recording systems you need to maximise tax deductions and ensure you're claiming every deduction possible. Scan the QR code below to download the app and optimise your Online Income Tax Return for the maximum refund.

Deduction Grabber

 

 

6. Conclusion

Understanding the tax implications of share investments is vital for effective financial planning. By managing franked and unfranked dividends, imputation credits, and capital gains, you can optimise your tax outcomes. For personalised advice, always consult with a registered tax professional or refer to the Australian Taxation Office’s guidelines.

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