Markets have seen a surge of new investors in recent years, but many Australians remain painfully unaware of the tax rules that apply to things like shares and ETFs. This can produce less-than-ideal tax outcomes in some cases and potentially get you in trouble with the ATO in others. Below are just a few mistakes you should be aware of.
Mistake #1: Engaging in wash selling
When you sell an investment for more than you paid for it, the profits are considered capital gains and will be added to your taxable income for that financial year.
The good news is you can potentially reduce your tax burden by selling your position in underperforming shares.
This is known as tax-loss selling, and it’s a common strategy used by investors. Things get murky, however, if you quickly repurchase the same shares after claiming the loss, just for the tax benefit. At this point you’re engaging in what’s known as ‘wash selling.’1
The ATO has warned that anyone deliberately entering into these sorts of sell and buy transactions could face swift compliance action and penalties.
So if you’re trading shares around mid-year, you’ll have to take care that you’re not doing anything that could be flagged as suspect. As the ATO has told investors in the past, it wants you to count your losses, not have them removed.
Mistake #2: Not keeping detailed records
Keeping detailed records of your investment activity — including when you bought an asset, how much it cost, and whether any brokerage fees were charged — can make your life easier in many ways. But it’s especially important if you’ve made multiple purchases of the same share over time.
For example, say you purchased 100 shares in the same company on two different occasions. You will have a total of 200 shares consisting of two ‘parcels.’ Despite being interchangeable, each parcel of shares will likely have a different purchase price and holding period.
That means you won’t be able to calculate your capital gain or loss come tax time unless you can identify which shares you’re parting with and when they were first acquired. To illustrate, consider the following example:
- In 2021, Alice bought 50 shares in a company worth $10 each
- In 2022, she bought a further 50 shares in the same company, this time for $15 each
- In 2023, the company’s share price dips and Alice decides to sell 75 shares for $12 each.
When completing her taxes, Alice will need to decide how many of the shares she sold came from the parcel bought in 2021 and how many came from the parcel bought in 2022, as the shares in each parcel will have a different cost base. The former will produce a capital gain while the latter can be claimed as a capital loss.
Having the flexibility to choose means you can select the shares that might generate the most favourable tax outcome for you. But this can be difficult if you’re not tracking when you bought and sold them in the first place.
Mistake #3: Not declaring reinvested dividends
If you’re invested in an asset that pays dividends or distributions, you might choose to have yours automatically reinvested. There are a number of benefits to this (such as saving on brokerage costs), but avoiding tax unfortunately isn’t one of them.
Under current tax rules, dividends that are automatically reinvested are treated as if they were distributed to you in cash.2 This means you’ll need to declare them as income on your tax return or risk getting on the ATO’s bad side.
ETFs in particular can be confusing since distributions tend to contain various elements — such as dividends, interest, foreign income, franking credits and capital gains — which might be taxed at different rates.
The good news is that if you’ve provided your tax file number to your broker or share registry, your dividends and distributions should prefill on your tax return, so take care not to delete them. Submitting something different might draw the attention of the ATO, who will want to know why your tax return doesn’t match the information they have on file.
1 Australian Tax Office
2 Australian Tax Office