Hundreds of thousands of Australians began investing in the last financial year, with the Australian Tax Office warning that mistakes on tax returns related to investments can delay refunds.
However, the ATO is warning first-time investors that simple mistakes can prolong the process and is offering extra tips to novice investors this tax season.
“Unfortunately, first-time investors often don’t understand their taxation obligations, don’t keep appropriate records and are more likely to make mistakes when lodging their tax returns,” ATO assistant commissioner Tim Loh said on Monday.
The Australian Securities and Investments Commission (ASIC), brokers, share registries and exchanges automatically provide information about dividend payment and the purchase and sale of shares to the ATO.
This year, some 5.8 million transactions relating to 612,000 taxpayers will be automatically prefilled, the ATO said.
However, taxpayers still need to make sure all the relevant data has been included, Loh said.
The ATO broke down the most common issues new investors face.
Exchange-traded funds (ETFs) and micro-investment platforms
ETFs have surged in popularity in the last year as the COVID-19 rollercoaster saw many decide to begin investing, with the ETF sector now worth more than $100 billion on the ASX.
If you’ve invested in one of these either directly or through a micro-investment platform in the last financial year, you will need to reflect this on your tax return.
ETFs will provide investors with a Standard Distribution Statement (SDS) which breaks down what needs to be declared on a tax return.
Generally, when an investor sells units, this statement will show the capital gains or losses that needs to be included on tax return.
However, even if you haven’t sold any units, you may still need to include your investment details in your tax return.
That’s because ETFs often provide investors with the choice of reinvesting their distribution, rather than paying it out to unitholders.
Even if you haven’t seen your investment deliver you any cash, you will still need to declare the distribution.
“Most people recognise that they must pay tax on any money earned from selling shares. But many don’t realise that tax also applies to dividends and distributions, even if they are automatically reinvested into a reinvestment plan,” Loh said.
What if I’ve sold shares?
If you have sold shares, you will need to determine your capital gain or loss and include it in your tax return.
And, added the ATO, the definition of a capital loss is firm. It only occurs on the sale of the share: investors cannot include ‘paper losses’ if the value of their share drops, but they continue to hold it.
And capital losses can only be offset against capital gains - not other types of income.
“Each year we see some enterprising entrepreneurs trying to offset their capital losses against income tax applied to other income, such as salary and wages. Others attempt to offset a ‘paper loss’ against actual income,” Loh said.
“Our sophisticated data analytics are able to spot this and we may apply penalties for investors that have intentionally done the wrong thing.”
It’s complicated, so keep good records
Loh admitted that taxes on investments can be complicated, but keeping good records is the best way to stay on top of your obligations.
These are the records you need to keep:
The date of purchase/reinvestment
Details of any non-assessable payments to you
Date and amount of any calls (if shares were partly paid)
Date of sale and sale price (if you sell them)
Any brokerage costs or commissions paid to brokers when you buy or sell
Details of events such as share splits, share consolidations, returns of capital, takeovers, mergers, demergers and bonus share issues.
Details of capital losses made in previous years – you may be able to offset these losses against future capital gains
Dividend or managed investment distribution statements (Standard Distribution Statements)
“Keeping good records, including dates, prices, commissions, and details of taxable events such as share splits, share consolidations, mergers, and demergers is essential to avoiding trouble at tax time,” Loh said.
“We want to make tax as easy as possible and using data from share trading platforms and the SDS from ETFs is a vital way that we help taxpayers avoid simple mistakes.
“Errors related to CGT or income from dividends and distributions, whether deliberate or accidental, will lead to amendments. You may need to repay some or all of a tax refund and penalties may apply.”