• Allowable deductions from dividend income

    If you invest in shares, you may be able to claim as a deduction from assessable income certain expenditure incurred in deriving your income from those shares. The following are examples of expenses that may be deductible.

    Management fees

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Where you pay ongoing management fees or retainers to investment advisers, you will be able to claim the expenditure as an allowable deduction. Only a proportion of the fee is deductible if the advice covers non-investment matters or relates in part to investments that do not produce assessable income. You cannot claim a deduction for a fee paid for drawing up an initial investment plan.

    Interest

    If you borrowed money to buy shares, you will be able to claim a deduction for the interest incurred on the loan, provided it is reasonable to expect that assessable dividends will be derived from your investment in the shares. Where the loan was also used for private purposes, you will be able to claim only interest incurred on that part of the loan used to acquire the shares.

    Interest on capital protected borrowings

    Under the Tax Laws Amendment (2006 Measures No. 7) Act 2007 interest attributable to capital protection under a capital protected borrowing is not deductible, and is treated as a payment for a put option. Interim measures apply to interest on borrowings for shares, units in unit trusts, and stapled securities acquired under capital protected borrowing arrangements entered into at or after 9.30am legal time in the Australian Capital Territory on 16 April 2003 and before 1 July 2007, where the shares, units or stapled securities are listed for quotation in the official list of the Australian Stock Exchange.

    A capital protected borrowing is an arrangement under which listed shares, units or stapled securities are acquired or secured using a borrowing or provision of credit where the borrower is wholly or partly protected against a fall in the market value of the listed shares, units or stapled securities. The amount of interest that is reasonably attributable to the capital protection is worked out using the methodology applicable to the type of capital protected borrowing. The measures do not apply to shares, units and stapled securities acquired under an employee share scheme. For more information, visit our website at www.ato.gov.au

    Travel expenses

    You may be able to claim a deduction for travel expenses where you need to travel to service your investment portfolio - for example, to consult with a broker or to attend a stock exchange or company meeting. You can claim a deduction for the full amount of your expenses where the sole purpose of the travel relates to the share investment. Where the travel is predominantly of a private nature, only the expenses which relate directly to servicing your portfolio will be allowable.

    Cost of journals and publications

    You may be able to claim the cost of purchasing specialist investment journals and other publications, subscriptions or share market information services which you use to manage your share portfolio.

    Internet access and computers

    You may be able to claim the cost of internet access in managing your portfolio. For example, if you use an internet broker to buy and sell shares, the cost of internet access will be deductible to the extent you use the internet for this purpose. You cannot claim a deduction for the private use portion.

    You can also claim a capital allowance (previously known as depreciation) for the decline in value of your computer equipment to the extent that it has been used for income producing purposes. You cannot claim a capital allowance for the private use portion.

    Borrowing expenses

    You may be able to claim expenses you incurred directly in taking out a loan for purchasing shares which can reasonably be expected to produce assessable dividend income. The expenses may include establishment fees, legal expenses and stamp duty on the loan. If you incurred deductible expenses of this kind totalling $100 or more, they are apportioned over five years or the term of the loan, whichever is less. If your expenses are less than $100, they are fully deductible in the year you incur them.

    Dividends that include listed investment company capital gain amounts

    If a listed investment company (LIC) pays a dividend to you that includes a LIC capital gain amount, you may be entitled to an income tax deduction.

    You can claim a deduction if:

    • you are an individual
    • you were an Australian resident when a LIC paid you a dividend
    • the dividend was paid to you after 1 July 2001, and
    • the dividend included a LIC capital gain amount.

    The amount of the deduction is 50% of the LIC capital gain amount. The LIC capital gain amount will be shown separately on your dividend statement.

    You do not show the LIC capital gain amount at item 17 on your tax return (or item 9 if you use Retirees TaxPack 2007).

    Example

    Ben, an Australian resident, was a shareholder in XYZ Ltd, a listed investment company. For the 2006-07 income year, Ben received a fully franked dividend from XYZ Ltd of $70,000 including a LIC capital gain amount of $50,000. Ben includes on his tax return the following amounts:

    Franked dividend (shown at T item 11)

    $70,000

    Franking credit (shown at U item 11)

    $30,000

    Assessable income

    $100,000

    Deduction for LIC capital gain (shown as deduction at item D7)

    $(25,000)

    Net assessable income

    $75,000

    Note: If Ben uses Retirees TaxPack 2007, he shows the amounts as follows: franked dividend at T item 8; franking credit at U item 8; deduction for LIC capital gain at item 12.

    Other deductions

    Any other expenses that you incur which relate directly to maintaining your portfolio are also deductible. These could include bookkeeping expenses and postage.

    Deductions denominated in a foreign currency

    All deductions that are denominated in a foreign currency must be translated into Australian dollars before being claimed on your Australian tax return. For more information on the exchange rates that should be used in translating foreign currency deductions, see the fact sheets Foreign exchange (forex): the general translation rule (NAT 9339) and Foreign exchange (forex): general information on average rates (NAT 13434) available on our website.

    Expenses that are not deductible

    Unless you are considered to be a share trader, you cannot claim a deduction for the cost of acquiring shares - for example, expenses for brokerage and stamp duty. These will form part of the cost base for capital gains tax purposes when you dispose of the shares. For more information, see the Personal investors guide to capital gains tax 2007.

    Last modified: 28 Jun 2007QC 27900