Financial Advisors & Planners Perth I Westmount Financial I Rick Maggi

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Tax guide for investments...

Around this time each year, the Australian Tax Office (ATO) advises taxpayers what’s in its sights as it begins to prepare for the upcoming tax returns lodgement season.

In 2022 its key investment areas of focus were around record keeping, rental property income and deductions, and capital gains from crypto assets, property and shares.

For the 2022-23 financial year the ATO has advised that rental property deductions and capital gains tax (CGT) will again be on its tax assessments radar (see In the ATO’s sights this tax time).

The next few weeks leading up to the end of this financial year on 30 June are an opportune time to ensure all your financial records are in order and that you have a clear picture of where you may have potential tax liabilities.
 

1. Identify all of your investments...

From an investments perspective, one of the first steps towards preparing to lodge your next income tax return is to record all of your asset holdings.

That’s fairly easy if your all investments are housed in one place, but many of us have investments spread across different investing platforms and asset classes.

It can be easy to lose track of some investments and miss tax liability issues that could potentially be averted if acted upon prior to 30 June.

Spend some time, over the next few weeks if possible, to do a full audit of your investment holdings so you’re fully across your portfolio.

It may be prudent to consult your financial adviser, if you use one, to determine if any portfolio adjustments before 30 June are appropriate.
 

2. Calculate your tax liabilities...

The ATO is reminding taxpayers to correctly calculate and declare capital gains and losses from the disposal of shares, managed investments, properties, and crypto assets during the financial year.

For individuals, capital gains tax (CGT) is payable at your marginal tax rate on profits you’ve made from sold investments.

Net capital gains are calculated after taking into account your total acquisition cost, including any costs associated with buying, holding, and selling your investment.

For Australian residents, if you’ve sold an investment you’ve owned for at least 12 months you’re entitled to discount your capital gain by 50% (subject to some exclusions). For complying super funds, the capital gain discount rate is 33.33 per cent. There is no discount for companies that generate capital gains.

Meanwhile, most other income earned from investments during the financial year is taxable.

If your investments are held in your own name, then any taxable income earned, including net capital gains, is added to your personal income, including your salary, and taxed at your marginal tax rate.

Investment income includes distributions paid from managed funds and exchange traded funds (ETFs), share dividends, bond distributions, interest income from cash, and rental income from investment properties.

You’ll need to provide a detailed record of distributions paid or attributed from each investment you owned in 2022-23 in your next tax return.

Be aware that that the ATO has sophisticated data matching capabilities to track any interest and investment income you’ve received, including from the disposal of ETFs, shares, managed fund units, bonds, property, cryptos, commodities, and other assets that may be liable for CGT.
 

3. Tax loss harvesting...

A way of reducing CGT is to consider selling investments before 30 June that have made a loss since you purchased them.

These losses, including losses carried over from previous tax years, can be used to offset gains made on other investments that have been sold during the financial year.

As well as reducing CGT liabilities, the sale of loss-making investments can also free up money to invest elsewhere.

But you may want to seek external professional advice before taking any action in this regard.

Investments currently recorded in your portfolio as loss-making may become profitable in the future.

You should also be mindful of the ATO’s ongoing focus on “wash sales”, where investors sell assets in one financial year to generate a tax-deductible loss and then repurchase the same or a similar asset shortly after.

The ATO may cancel any tax benefits received if it determines transactions have primarily been undertaken to avoid the payment of CGT.
 

4. Keep track of allowable deductions...

Allowable tax deductions can be offset against investment income.

Among other things, you may be able to claim a deduction for expenses you incur in earning interest, dividend or other investment income.

You also may be able to claim a deduction if you attend seminars in relation to existing investments.

The ATO allows investors to claim a deduction for interest charged on borrowed money to buy shares or other investment assets. You can also claim deductions on investment account-keeping fees and investment management fees or retainers.

Furthermore, you may be able to deduct a portion of other investment costs you incur including expenses linked to how you monitor your investments.

Examples include depreciation in the value of your home computer and the cost of internet access.

Deductions are also allowed by the ATO for some travel expenses and the cost of specialist investment journals and subscriptions.

In terms of rental property deductions, the ATO says nine out of 10 investment property owners are lodging incorrect income tax returns by leaving out rental income, overclaiming expenses, or claiming for improvements to private properties.

This is despite 87% of individual rental owners using a registered tax agent to prepare their returns.

The ATO says it’s particularly focused on interest expenses and ensuring rental property owners understand how to correctly apportion loan interest expenses where part of the loan was used for private purposes.
 

Summary...

With limited time left before the end of the financial year it makes sense to get yourself into good tax shape before 30 June.

That really means ensuring that you’re across all your investments, are aware of income you’ve earned during the year, your potential tax liabilities, and your allowable deductions.

If you’re unsure of what pre-30 June investment steps make the most sense for you, consider contacting a tax specialist and/or financial adviser.