Tax Implications of Investing in Shares

What are the Tax Implications of Investing in Shares?

Investing in shares can be a lucrative way to grow your wealth, but it's essential to understand the tax implications associated with different types of income and gains you may receive from your investments. We will cover the revenue streams from shares, including franked and unfranked dividends, imputation credits, and the calculation of gains from selling shares.

1. Revenue Streams from Shares

When you invest in shares, you can earn income in two primary ways:

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

2. Dividends

Dividends can be classified into two types:

• Franked Dividends: These dividends come with imputation credits (or franking credits), which represent the tax already paid by the company on its profits.
• Unfranked Dividends: These dividends do not have any attached franking credits and are fully taxable in the hands of the investor.

Franked Dividends and Imputation Credits

Franked dividends are beneficial because they 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 (the amount before company tax) is $100 ($70 dividend + $30 franking credit).

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

• Calculation:
  • Grossed-up dividend: $100
  • Your 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 the excess franking credits.

Unfranked Dividends

Unfranked dividends are straightforward as they are fully taxable without any 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 you make 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 of the shares.

• 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

You must 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 on the sale of shares, follow these steps:

1. Determine the Cost Base: The cost base includes the purchase price of the shares plus any associated costs like brokerage fees.

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

2. Calculate the Sale Proceeds: This is the amount you receive from selling the shares, minus any associated costs like brokerage fees.

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

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

4. Apply the CGT Discount (if applicable): If you held the shares for more than 12 months, apply the 50% discount.

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

5. Report and Pay Tax: Include the taxable capital gain in your assessable income and pay tax according to your marginal tax rate.

5. Conclusion on Share Investing

Understanding the tax implications of investing in shares is crucial for effective financial planning. By knowing how to handle franked and unfranked dividends, imputation credits, and capital gains, you can optimise your tax outcomes and make informed investment decisions. Always consider consulting with a registered Gotax professional for personalised advice and to ensure compliance with the Australian Taxation Office’s guidelines.

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