Guide to investment
Guide to investment
Overview
Using your money to try to make more money or gain assets is called investing. Profits or returns you make on your investments usually become part of your income for tax purposes. Many expenses relating to your investment are tax deductible - for example, interest on money you borrow to buy shares.
Australian residents for tax purposes are taxed on their worldwide income, so whether you have investments in Australia or overseas there are likely to be tax implications in obtaining, owning and disposing of them.
Understanding how tax works in relation to your investment helps ensure you don't pay more tax than you need to, which we refer to as being 'tax-effective'.
Tax planning
Organising your financial affairs to give yourself the greatest tax advantage is called tax planning and is legitimate when you do it within the letter and the spirit of the law. By checking out investment opportunities before you invest and understanding the tax aspects of your investments you get your tax return right and don't pay more tax than you need to.
Keeping good records
Good records allow you to report your income accurately and claim all the deductions you are entitled to, including when you work out your capital gain or capital loss if you dispose of your investment.
Bank accounts and income bonds
Bank interest and bonuses from income bonds are income for tax purposes, even if you are a non-resident or the account is in a child's name. Financial institutions take tax at the highest marginal tax rate out of your interest when they don't have your tax file number (TFN). You can claim a credit for this withheld tax on your tax return.
Shares
Dividends (income from shares) are income for tax purposes. You can claim deductions for costs related to the dividend income, such as management fees and interest on money you borrowed to buy the shares. There are also other tax implications in obtaining, owning and disposing of shares, including shares in employee share schemes (ESS).
Managed investment trusts
There are a number of specific requirements relating to managed investment trusts. You need to include income or credits you receive from a trust investment product in your tax return but you can't claim deduction amounts the trust has already claimed.
Making capital gains and capital losses
Your capital gain (or capital loss) on your investment is the difference between what it cost you to get and keep the investment and what you received when you disposed of it. You need to include any capital gains in your tax return, although you can offset them against capital losses.
Foreign investments
Australian residents for tax purposes are taxed on their worldwide income, so if you made a capital gain on an overseas asset, have interests in foreign companies or foreign trusts, or have a foreign life insurance policy, you need to tell us about your income from these investments on your tax return.
Contents: Guide to investment
Overview
Tax planning
Get your tax return right
Investigate before you invest
Identify a dodgy scheme
Keeping good records
Records you should keep
How long to keep records
Bank accounts and income bonds
Shares
Obtaining shares
Owning shares
Disposing of shares
Employee share schemes
Managed investment trusts
Trust income and credits
Deductions from trust income
Trust losses
Capital gains from a trust
Making capital gains and capital losses
Foreign investments
Tax planning
Organising your financial affairs to give yourself the greatest tax advantage is called tax planning. Tax planning is legitimate when you do it within the letter and the spirit of the law.
Get your tax return right
It's important you understand the tax implications of your investments and get your tax return right because you're personally responsible for declaring all your assessable income on your tax return, and claiming only your allowable deductions.
Pay as you go (PAYG) instalments
If you reported gross investment income of over $2,000 ($1 if you are not a resident) on your last income tax return, you may be required to make PAYG instalments. It's important to plan ahead for paying these instalments.
Investigate before you invest
You may be invited to put your money into a 'tax-effective' arrangement that you suspect may be dodgy or too good to be true. Investigate before you invest. Check that the promoter and the investment scheme are legitimate and sound. In particular, get independent professional advice.
Identify a dodgy scheme
It's often difficult to tell a legitimate scheme from a dodgy one. Promoters can be very convincing. There are some 'red flag' marketing claims that will help you identify dodgy schemes. If you have concerns about a promoter or a tax scheme, you can speak to us (anonymously if you want). We investigate further and take action to stop the promoter if the scheme seems outside the law. This helps protect other taxpayers from being drawn into the scheme.
Get your tax return right
Under Australia's self-assessment tax system, you're responsible for declaring all your assessable income on your tax return and claiming only the deductions and tax offsets you're entitled to. The law lets us review your tax return (which may result in an adjustment to the amount of tax you have to pay) but as long as you do the right thing (that is, as long as you declare all your assessable income and claim only what you're entitled to) we usually accept your tax return without adjustment.
There are a number of support initiatives to help you get your tax right on your investments:
- If you use e-tax to lodge your tax return you'll have the option of having information from third parties, including your employer and your financial institutions, filled in automatically. This optional service makes it easier for you declare all your income, claim your entitlements and avoid errors.
- If you're unsure about how tax law applies to your tax-effective arrangements, you can apply for a private ruling. We'll assess the arrangement and give you written advice on how the tax law applies to it. This advice is binding on us (as long as you implement the arrangement the way you describe it to us).
- If you realise that you didn't include something on your tax return that you should have, or there is some other error on it, you can amend your return. The amount of any penalty that may otherwise have been imposed will, in most cases, be reduced.
- If you suspect that you have invested in a tax avoidance scheme, we offer substantial reductions in penalties to people who come to us before we start to investigate them.
If you're still not sure, contact us or talk to a professional tax adviser.
Pay as you go (PAYG) instalments
The pay as you go (PAYG) instalment system is a means of paying instalments towards your expected income tax liability on your business or investment income (or both) for the current income year.
Your actual income tax liability is worked out when your income tax return is assessed. Your PAYG instalments for the year are credited against your assessment to determine whether you owe more tax or are owed a refund.
If you are required to make PAYG instalments we (the ATO) will write to you and notify you of your instalment rate. We work out this rate based on information in your last income tax return.
As a general rule we will notify you of an instalment rate if:
- in your last income tax return you reported gross business or investment income, or both (excluding any net capital gains) of $2,000 or more ($1 if you are not a resident)
- your tax payable on your last assessed income tax return was more than $500 (disregarding any voluntary payments or PAYG instalment credits that were applied)
- your 'notional tax' is more than $250
- you are not entitled to the seniors and pensioners tax offset.
Generally speaking, notional tax is the tax that would have been payable on your business or investment income, or both (excluding net capital gains) in your latest income tax assessment, based on current income tax rates.
The $2,000 threshold does not include salary or wage income from which tax has already been withheld.
We evaluate your status for PAYG instalments when you lodge or amend your most recent income tax return. If you are no longer required to pay PAYG instalments, we will write to you to withdraw your instalment rate.
There are a number of ways to check out the legitimacy of an investment prospect and its promoter. Before you invest your money in anything, use our checklist and check it out. If you invest in a dodgy tax scheme, you're risking your money and could also have to pay any missing tax (with interest and penalties) long after the promoter and your money are gone.
Checklist
- Check the promoter's licence. People who offer financial products and advice must work for a business that holds an Australian financial service licence issued by the Australian Securities & Investments Commission (ASIC).
- Check you have either a product disclosure statement or a prospectus (as a potential investor you must be given one or the other). If you haven't received one, contact ASIC at infoline@asic.gov.au
- Get independent advice from an adviser who has no connection with the seller or the investment scheme.
- Check with us (or ask your adviser to do this) to find out if the scheme has a product ruling - many legitimate tax-effective arrangements do. A product ruling provides you with a legally binding assurance that the tax benefits set out in the ruling will be available to you, as long as the scheme is carried out in the way described in the ruling.
- Check our taxpayer alerts to find out if the scheme has any of the characteristics described in the alerts. Our alerts are early warnings of significant and emerging tax planning schemes we are concerned about and are assessing to see whether they are within the law.
- Apply to us for a private ruling to confirm how the tax law applies to the arrangement. You can rely on private rulings as binding on us, as long as the scheme is carried out as described in the ruling.
- Look for the characteristics of dodgy schemes, the 'red flags' that help you distinguish a dodgy scheme from a legitimate one.
Identify a dodgy scheme
It's often difficult to tell a legitimate scheme from a dodgy one. Promoters can be very convincing. The following are some marketing lines that should raise a red flag in your mind:
- There are no risks. We guarantee the returns.
- You don't need credit or asset checks, we'll lend you the money.
- Even if the investment doesn't go ahead, you'll still make a profit from your tax refund.
- Sign this secrecy agreement - we don't want our competitors stealing our ideas.
- There's no need to ask the Australian Taxation Office (ATO) if it's okay. We already have a ruling.
- You can get up to 100% tax deductions fully supported by ATO rulings.
- A top lawyer and accountant have looked at the investment and they think it's great.
- Your funds will be managed by an international bank (or international trust, or global corporation).
- We'll put your money in a tax-free overseas account.
- You can run your business through your own offshore company.
The bottom line is: if it sounds too good to be true, it probably is.
How to report promoters of dodgy schemes
If you have concerns about a promoter or a tax scheme, you can speak to us (anonymously, if you want). We investigate further and take action to stop the promoter if the scheme seems outside the law. This helps protect other taxpayers from being drawn into the scheme.
Keeping good records
The Australian tax system relies on taxpayers assessing their own tax affairs, which means you are responsible for working out how much to declare and claim on your tax return. This is called a self-assessment system.
You need to be able to show us how you arrived at your figures - in some cases you may need to provide written evidence. Incomplete records could mean you have to pay more tax than you need to. Good records allow you to report your income accurately and claim all the deductions you are entitled to, including when you work out your capital gain or capital loss after you dispose of your investment.
Maintaining good records will help you (and your tax agent if you have one):
- prepare your tax return
- ensure that you're able to claim all your entitlements
- provide written evidence of your income and expenses if we ask you to substantiate the information you provide in your tax return.
Records you should keep
You need to keep records of:
- payments you've received - such as bank statements showing interest, statements from companies or managed funds showing dividends or distributions
- expenses related to your investments - such as bank statements showing the interest charged on money you borrowed for an investment and records of the decline in value of depreciating assets
- payments, expenses and other transactions relating to 'CGT assets' (that is, assets on which you can make capital gains that become part of your income for tax purposes when you sell them).
How long to keep records
Generally you have to keep your records for five years after we've processed the tax return they relate to.
Records you should keep
You need to keep any records relating to your investments or investment assets that show how much you paid for them, what you received if you disposed of them, what income you received from them and the expenses you incurred in owning and maintaining them, This is the written evidence you need if we ask you how you worked out your tax position.
Payments you receive
For income from interest, dividends or managed funds, written evidence can include:
- statements, passbooks or other documents from your financial institution showing the amount of interest you receive
- statements from the company, trust or partnership that pays you dividends or makes distributions to you - these statements should show the amount of franked and unfranked dividends you receive, the amount of franking credits and any tax file number (TFN) amounts withheld from unfranked dividends
- statements or other documents from a managed fund showing the amount of any distribution - they should specify the amount of any primary production or non-primary production income, any capital gains or capital losses, any foreign income and any credits, such as franking credits
Expenses
Expense records can include documents such as bank statements showing the interest charged on money you borrowed for share investment.
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You can't claim general deductions for expenses that are private or capital in nature.
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CGT assets
Most investment assets, including shares, are capital gains tax (CGT) assets. This means that any profit (capital gain) you make from selling them becomes part of your income for tax purposes.
A 'CGT event' must occur for a capital gain (or capital loss) to arise. The most common CGT event occurs when you dispose of a CGT asset - by selling it, giving it away or transferring it to someone else.
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Your home is generally exempt from tax. However, in some circumstances this may change. For example, if you rent out part of your home, use it for work, or it's on more than 2 hectares of land. For more information, refer to Guide to property.
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You should keep the following records for any CGT asset:
- documents showing the date you acquired the asset and the date the CGT event occurred - for example, contracts for the purchase or sale of shares and dividend reinvestment statements from your unit trust or managed investment fund
- documents showing the amount and date of any expenses you incurred in relation to the asset - if you are not entitled to claim these expenses in your annual tax return, you may be able to include it in the cost base of your asset, which you use to work out your capital gain or capital loss
- amounts of any net capital losses made in previous years, because in the future you may be able to offset capital gains against these losses.
You can also set up an asset register. It's easy to do and once you've entered your information into your register you may be able to throw away some of the old records you've been keeping.
How long to keep records
In most cases, you must keep your written evidence for five years from the date we send you the notice of assessment for the relevant tax return (generally taken to be the date on the notice).
In some circumstances the retention period or start date is different. If you:
- have claimed a deduction for decline in value (formerly known as depreciation), the five-year retention period starts from the date of your last claim for decline in value
- acquire or dispose of an asset, keep your records for five years after it is certain that no capital gains tax (CGT) event can happen for which those records will be needed to work out a capital gain or capital loss
- are in dispute with us, keep your records until the later of
- five years from the date we process your return (generally taken to be the date on the notice), or
- the date the dispute is finalised.
Bank accounts and income bonds
Interest from a bank or other financial institution is part of your income for the year, even if you are a non-resident for tax purposes or the account is in a child's name. So are bonuses from friendly society income bonds.
Even if the funds earning the interest were not subject to tax, the interest is. For example, if you won some prize money and banked it, you would not usually include the prize money on your tax return, but you would include the interest you earned on it.
You can also claim a tax deduction for expenses incurred in earning interest income or income from friendly society income bonds.
Banks withhold tax from your interest at the highest marginal rate if they don't have your tax file number (TFN). This may be a higher rate than you need to pay. However, you can claim a credit for the tax on your tax return.
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We check that you include on your tax return all the interest you received during the year. If you haven't, we send you a notice of amended assessment that includes the omitted interest, requiring you to pay the tax on it, probably with penalties.
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Children's accounts
If you open or operate an account for a child and the funds in that account belong to you, or you use the funds in the account as if they belong to you, you must include any interest from the account in your tax return.
Special rules apply in taxing the income of people under the age of 18 years. These rules are to discourage adults from splitting their income and diverting it to their children. Under these rules, certain types of income received by minors may be taxed at higher rates.
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For more information, refer to:
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TFN withholding tax
Financial institutions withhold tax from your interest if you haven't given them your TFN. They do this at the highest marginal tax rate. The amount withheld in this way is referred to as TFN withholding tax.
You need to include interest as income on your tax return. You can also claim a credit for any TFN withholding tax you have paid.
You don't need to provide your TFN if:
- you are under 16 years of age
- the account is in your name, and
- the account earns less than $420 interest each year.
This exemption from TFN withholding tax lasts until the end of the calendar year in which you turn 16.
If you are under 18 years old on 30 June of a financial year, your interest may be taxed under the special high tax rates for minors.
Foreign resident withholding tax
Financial institutions automatically withhold tax from interest earned on accounts held by foreign residents. This is called non-resident withholding tax.
If you have given the financial institution your overseas address, the tax will be withheld at the rate of 10%. Without your overseas address it is withheld at the highest marginal rate of 46.5%.
You do not include this interest as income on your Australian tax return if non-resident withholding tax was deducted from it.
If you are an Australian resident living overseas temporarily you can avoid having tax withheld from your interest by:
- advising your financial institution that you continue to be an Australian resident
- giving your financial institution your TFN or ABN.
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For more information about what to do if you are:
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Income bonds
Income bonds are a type of life insurance policy only friendly societies issue. They are sometimes marketed as 'bonus bonds' or 'savings bonds'.
Unlike other life insurance policies, which pay bonuses on maturity or surrender, an income bond is like a savings investment account and distributes regular bonuses. For tax purposes, these bonuses are treated in the same way as interest - that is, you must include these bonuses in your income in your tax return.
Shares
Dividends (income from shares) are income for tax purposes. There are also other tax aspects to obtaining, owning and disposing of shares, including shares in employee share schemes. You can claim deductions for costs related to the dividend income, such as management fees and interest on money you borrowed to buy the shares.
A company issues shares to raise the money it needs to finance its operations. In doing so, it grants shareholders (investors) various entitlements - for example, the right to receive dividends or the right to share in the capital of the company upon winding up. A company may issue different classes of shares, so these entitlements may vary between different shareholders.
Obtaining shares
You usually obtain shares by buying them, but there are other ways - for example, you might receive shares if you have a policy in an insurance company that demutualises. Regardless of how you get them, it's important to keep track of your share transactions from the beginning so you can claim everything you're entitled to and work out your tax accurately.
Owning shares
While you own the shares, you need to declare any dividend income you receive and you can claim deductions for related costs, such as management fees and interest on money you borrowed to buy the shares.
Disposing of shares
When you dispose of your shares, you generally make a capital gain or capital loss, both of which you need to take into consideration when preparing your tax return. It will be important to have records of the dates you obtained the shares and how much you paid for them when you go to work out your capital gain or capital loss.
Employee share schemes
If you acquire shares under an employee share scheme, you must include what's known as the 'discount' received on the shares or rights in your income for tax purposes. The discount is the difference between the market value and what you paid - and is calculated at the date you acquired the shares or rights. Income tax may apply to any capital gain you make when you dispose of shares or rights from the scheme.
Example: Obtaining, owning and disposing of shares
Jo takes out a bank loan to buy shares, from which she expects to receive income in the form of dividends. She cannot claim an immediate deduction for some of the costs of obtaining the shares, such as brokerage and stamp duty. She includes these costs in her 'cost base'. She declares the dividend income and claims a deduction for the interest on the loan in her tax return each year.
Some years later Jo sells her shares for more than she paid for them. After deducting her cost base, she still makes a profit on the sale. This means she makes a capital gain for tax purposes. She declares the capital gain in her tax return for the year she sells her shares.
Obtaining shares
You can obtain shares:
- by buying them
- by inheriting them
- by being given them (receiving them as a gift)
- by them being transferred to you as the result of a marriage or relationship breakdown
- through an employee share scheme
- through a conversion of notes to shares
- through demutualisation of an insurance company with which you have a policy
- through bonus share schemes of companies in which you hold shares
- through dividend reinvestment plans of companies in which you hold shares
- through mergers, takeovers and demergers of companies in which you hold shares.
The key tax issues you need to be aware of at this stage are:
- Generally, you can only declare your dividends and claim your expenses if your name is on the share purchase order.
- If you hold a policy in an insurance company that demutualises, you may be subject to capital gains tax either at the time of the demutualisation or when you sell your shares.
- Even if you didn't pay anything for your shares, you should find out the market value at the time you obtain them - otherwise, you may pay more tax than necessary when you dispose of them.
- You can't claim a deduction for some costs related to purchasing your shares, such as brokerage fees and stamp duty, but you can include them in the cost base (cost of ownership), which you deduct from what you receive when you dispose of the shares to work out your capital gain or capital loss.
- You need to keep proof of all your share transactions from the beginning to ensure you can claim everything you're entitled to, otherwise you may have to pay more tax than you would otherwise need to.
- In some circumstances, you may be considered the owner of shares even if they were purchased in your child's name.
You can also set up an asset register. Doing so is easy and once you've entered your information into your register you may be able to throw away those old records you've been keeping.
Owning shares
When you own shares, the following activities will create tax obligations for you:
- receiving dividends
- participating in a dividend reinvestment plan
- participating in a bonus share scheme
- receiving a call payment on a bonus share scheme
- receiving non-assessable payments
- being involved in company actions such as mergers, takeovers and demergers.
The key tax issues you need to be aware of at this stage are:
- You need to declare all your dividend income on your tax return, even if you use your dividend to purchase more shares - for example, through a dividend reinvestment plan.
- The costs you may be able to claim as tax deductions include management fees, specialist journals and interest on money you borrowed to buy the shares.
- Receiving bonus shares can alter the cost base (costs of ownership) of both your original and bonus shares.
- You can choose to roll over any capital gain or capital loss you make under an eligible demerger - that is, you do not need to tell us about your capital gain or capital loss the year the demerger occurs. Instead, you settle your tax obligations in the year that another CGT event happens to those shares.
- We may treat payments or other benefits you receive from a private company in which you are a shareholder as if they were a taxable dividend paid to you.
- If you receive a retail premium for rights or entitlements that you didn't take up, you need to declare these premiums as income on your tax return for the year.
Disposing of shares
You can dispose of your shares:
- by selling them
- by giving them away
- by transferring them to a spouse as the result of a breakdown in your marriage or relationship
- through share buy-backs
- through mergers, takeovers and demergers
- because the company you hold them in goes into liquidation.
The key issues you need to be aware of at this stage are:
- You are likely to make either a capital gain or capital loss when you dispose of your shares.
- Your capital gain is the difference between your cost base (costs of ownership) and your capital proceeds (what you receive when you sell your shares).
- We provide a number of calculators to help you work out your capital gain or capital loss.
- You have a capital loss on your shareholding when an administrator or liquidator declares that a company's shares are worthless - you are entitled to offset capital gains against that capital loss, even in future years.
- You may be able to reduce your capital gain by the CGT discount of 50% if you have owned your shares for more than 12 months.
- You may be eligible to claim a deduction for listed shares you give to a deductible gift recipient if the shares are valued at $5,000 or less and you acquired them at least 12 months earlier.
Employee share schemes
Some companies encourage employees to participate in employee share schemes by offering them discounted shares or rights (including options) to acquire shares. The amount of the discount is treated as assessable income for tax purposes.
You acquire shares or rights under an employee share scheme if the acquisition is in relation to your employment or any services you provide.
The discount you receive is worked out as the market value of the shares or rights less any money or other consideration you provided to acquire them. It is calculated at the date you acquired the shares or rights.
The key tax issues you need to be aware of at this stage are:
- You generally include the amount of the discount in your assessable income for the income year you acquire the shares or rights (although in some circumstances you can defer this until a later income year).
- Capital gains tax may apply when you dispose of the shares or rights.
Managed investment trusts
There are a number of tax issues relating to income from managed investment trusts.
Trust income and credits
You must show any income or credits you receive from any trust investment product on your tax return.
Deductions from trust income
You can claim tax deductions for costs related to managed investment trust income (such as management fees, specialist journals and interest on money you borrowed to invest) but not amounts the trust has already claimed or expenses incurred in deriving exempt income or non-assessable non-exempt income.
Trust losses
A loss made by the trust is 'retained' in the trust and there's no income to distribute. However, in some cases you are required to enter a loss on your tax return - such as when your income is subject to the primary producer averaging provisions.
Capital gains from a trust
If you receive a trust distribution that includes a capital gain or non-assessable payment you need to be aware of the special rules for capital gains from a trust.
Trust income and credits
You must show any income or credits you receive from any trust investment product on your tax return. This includes income or credits from a cash management trust, money market trust, mortgage trust, unit trust or managed fund such as a property trust, share trust, equity trust, growth trust, imputation trust or balanced trust. If you're unsure whether your trust investment product is one of these types of trusts, check with the trustee.
On your tax return, show:
- income and capital gains from a trust (including a managed fund)
- your share of a national rental affordability scheme tax offset.
You can also claim credits for tax:
- paid on or withheld from trust income
- withheld from fund payments from a managed investment trust
- withheld from trust income subject to foreign resident withholding
- withheld from trust income subject to non-resident withholding tax, if you were in fact a resident.
And you can claim a deduction for:
- an interest in a trust that made a loss from primary production activities.
Amounts in your trust distribution described as being tax-free, tax-deferred or tax-exempted, or as a capital gains tax (CGT) concession, are likely to be non-assessable payments that you do not have to declare as income. However, they may be relevant in determining the amount of a net capital gain or may affect the cost base of your unit or trust interest.
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For more information on:
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New Zealand company - Australian franking credits
If you've received a distribution from a trust that includes a dividend with Australian franking credits from a New Zealand company, you may be eligible to claim the Australian franking credits (but you can't claim New Zealand imputation credits).
Deductions from trust income
Tax deductions for managed investment trusts can include management fees, specialist journals and interest on money you borrowed to invest.
If you made a prepayment of $1,000 or more for something to be done (in whole or in part) in a future income year, the amount you can deduct may be affected by the rules relating to prepayments.
Thin capitalisation rules
If you've incurred deductible debt expenses (such as interest and borrowing costs) in relation to a distribution from a trust, the amount you can deduct may be affected by the thin capitalisation rules.
The thin capitalisation rules can apply to both Australian and foreign entities that have multinational investments.
If you are not affected by the thin capitalisation rules for a given income year, you can claim your allowable debt deductions in full.
Expenses you can't claim
You can't claim a deduction for expenses incurred in deriving exempt income or non-assessable non-exempt income, such as expenses incurred in deriving distributions on which family trust distribution tax or trustee beneficiary non-disclosure tax has been paid.
You also can't claim a deduction for amounts the trust has already claimed or that only the trust can claim, for example, expenditure on landcare operations or water facilities.
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For more information on deductions for expenditure on landcare operations and water facilities, refer to:
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Investment - home
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Trust losses
If a trust makes an overall loss in an income year, the loss is retained in the trust - there is no amount of net income available for distribution. However, in some cases you (as the beneficiary) are required to enter a loss on your tax return. This happens when your income is subject to the averaging provisions available to primary producers and the trust has made a loss from its primary production activities but has an overall net income amount, part or all of which it distributes to you.
Your distribution advice or statement from the trust will separately disclose your share of the primary production loss (which is needed for averaging purposes) and your share of other income.
Capital gains from a trust
Special rules apply if you're a beneficiary who is entitled to a share of a trust's net capital gain. Trusts include managed funds such as property trusts, share trusts, imputation trusts, growth trusts and balanced trusts.
Distributions from trusts can include different types of amounts. The following two are relevant for capital gains tax (CGT) purposes:
- capital gains
- non-assessable payments.
Non-assessable payments mostly affect the cost base of units in a unit trust (including managed funds) but can in some cases create a capital gain.
The trustee should advise you whether the CGT discount, the small business 50% active asset reduction, or both, have been taken into account in working out the trust's net capital gain.
Trustees, including fund managers, may use different terms to describe the methods of calculation and other terms. For example, they may use the term 'non-discount gains' when they refer to capital gains worked out using the indexation or 'other' calculation methods.
Making capital gains and capital losses
Selling investment assets (such as shares or managed fund investments) is the most common way you make a capital gain or capital loss. Managed funds also distribute capital gains that must be reported and some company actions (such as liquidations, takeovers and mergers) can result in you making a capital gain (or capital loss) on shares you hold, without any action on your part.
You can also make a capital gain (or capital loss) on overseas assets if you are an Australian resident for tax purposes.
Generally, a capital gain (or capital loss) is the difference between what it cost you to get and keep an investment asset and what you received when you disposed of it.
Capital gains tax (CGT) is the tax you pay on your net capital gain. It isn't a separate tax, just part of your income tax.
If you make a capital loss when you dispose of an asset, you can use it to reduce any capital gain you made in the same financial year. If you have not made a capital gain in the same financial year, you can use the loss to reduce a capital gain in a later year. You cannot deduct capital losses or a net capital loss from other income.
It's important to keep records of your investment assets from the time you get them. Incomplete records could mean paying more tax than you would otherwise need to when you dispose of an asset. You need records of when you acquired an asset, its value at that time and any other costs associated with acquiring it.
It's time to start keeping records, or start a CGT asset register, if you:
- purchase or inherit an asset
- receive an asset as part of a divorce settlement or as a gift.
For more information, see Keeping good records.
Example
Pam has won some money and decides to invest it. She seeks help from a financial adviser who draws up an initial investment plan for her. His fee for drawing up the plan is not tax deductible because it is capital in nature. While she owns the investments, Pam declares the income she receives and claims deductions for her ongoing investment expenses, such as management fees. Some years later Pam sells her investment assets for more than she paid for them. In working out her capital gain, she includes the adviser's original fee in her cost of acquiring the assets, which reduces her capital gain. (Pam can also use the CGT discount method to reduce her capital gain by 50% because she has owned the assets for more than 12 months). She declares the capital gain in her tax return.
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For more information about:
- capital gains tax, refer to
- showing capital gains income on your tax return, refer to Tax return supplementary instructions 18 - Capital gains.
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Investment - home
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Foreign investments
If you are an Australian resident with overseas assets you need to take any capital gains or capital losses you make on those assets into consideration when doing your tax return.
Additionally, if you have interests in a foreign company, a foreign trust or a foreign life insurance policy, you may have to include income you receive from these interests in your tax return.
If you receive foreign income that is taxable in Australia and you paid (or are taken to have paid) foreign tax for which you were personally liable on that income, you may be entitled to an Australian foreign income tax offset.
You may also be entitled to an Australian foreign income tax offset if you received income, or a profit or gain, from a source in an area covered by an international tax-sharing treaty (for example, the Joint Petroleum Development Area), to the extent that the income or profit or gain is taxed in Australia.
Last Modified: Tuesday, 27 November 2012
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