Investing in shares:
An overview on the tax implications
Shares are an attractive investment option for individuals looking to build their wealth. As with all investments, the return on investment is usually correlated with risk. Investors can adjust their exposure to risks depending on their risk appetite, as there are a range of listed companies to invest in.
Shares can provide a steady stream of passive income through dividends. Most dividends paid by Australian listed companies are franked, therefore recipients will be entitled to a franking credit tax offset when they lodge their returns. You are also exposed to the capital appreciation and depreciation of the share price, which could net you a capital gain or capital loss when you decide to sell them.
You can invest in shares in your own personal name, through a self-managed superfund or through a trust. Companies are typically not an attractive investment vehicle when it comes to shares because companies do not qualify for the 50% Capital Gains Tax (CGT) discount. Generally, capital gains on assets held longer than 12 months are entitled to a 50% discount which could significantly reduce any tax payable on the gains.
When purchasing shares through a Discretionary Trust, such as a family trust, the main advantage would be the ability to distribute income and capital gains to lower tax rate family members who are beneficiaries of the trust. Note that minors have a limit on how much income they can receive; going over the limit will incur tax at the highest marginal rate. Aside from tax minimisation benefits, other benefits of holding shares in a trust include asset protection and estate planning.
Individuals with a Self-Managed Super Fund (SMSF) can also purchase shares in the name of the Fund. The main benefits of using a SMSF would be for its tax advantages. For capital gains on assets held for more than 1 year, the SMSF is entitled to a CGT Discount of 33%; only 2/3 of the gain is taxable. The tax rate paid by an SMSF is also much lower than individual tax rates. SMSFs pay tax at a 15% rate during accumulation phase. Members who reach pension age may also qualify for tax exemptions on income and capital gains, whereby the SMSF generally pays no tax on its income.
As someone who buys and sells shares, the ATO would assess if you classify as a share trader or a share investor. The ATO looks at the regularity of trades and nature of activities to determine if they are similar to a share trader. The tax implications for both are significantly different as the profit or loss of a share trader would be classified as ordinary income and included in assessable income – as opposed to capital gain or loss as a share investor. Capital losses can only be used to offset capital gains, and are carried forward indefinitely until future capital gains are incurred. The types of tax deductions available would also be different between a share trader and investor.
In practice, there could be way more complex issues with share investing and each situation is unique to its own. As with any significant investment decision, you should seek professional financial advice. If you have any questions or would like us to assist you in setting up an investment entity, give us a call on 7078 3505.
By James Yong – Accountant – Venture Private Advisory
You might also like to read this Investing: Growth vs Income.