In my February column I explained the tax implications of investing in shares that pay franked dividends and how you calculate the return you are earning on your investment. You may wish to visit that article which is available on The Diary website under columns.
Whilst last month’s column was primarily directed at investors that hold their shares for the longer term, this month the focus will be on share traders who rely more on generating an income stream in the short term by buying shares they believe are undervalued and hopefully selling out at a profit.
Whilst you may decide not to hold on to certain shares for the longer term and are exhibiting characteristics typical of a share trader, you need to be genuinely carrying on the business of share trading in order to be taxed as a share trader.
Factors taken into account in determining if you are in the business of share trading
- The nature of the activities must indicate the intention to operate a business by making a profit from buying and selling shares as evidenced by the use of a methodology for buy, hold or sell decision making, researching companies and analyzing the market or using commercial modelling or decision making packages.
- Evidence of high trading volume on a regular or routine method.
- Organised in a business-like way backed by appropriate qualifications, expertise, training or skills and maintaining appropriate records of purchases and sales and expenses.
Tax Implications specific to being in the business of share trading
- Receipts from the sale of shares are assessable income.
- Purchases of shares are treated as trading stock until they are sold when they form part of cost of sales and become an allowable deduction.
- Other costs of buying and selling such as brokerage and GST on brokerage are also part of cost of sales.
- Costs of operating the business of share trading such as subscriptions to relevant journals, financial advisers, share trading models and other investment services such as the Australian
- Stock Report, The Motley Fool and Morningstar and interest on loans funding share purchases are allowable deductions and included as business expenses.
- Should any shares be held for more than 12 months before selling, share traders in the business of share trading cannot benefit from the 50% discount on capital gains as the gain is treated as normal business net income.
- Because you are operating an enterprise you will be required to apply for an ABN.
Tax implications specific to holding shares as an investment
- Receipts from the sale of shares are not assessable income but are subject to capital gains tax.
- Payments for the purchase of shares are not allowable deductions but are a capital cost offset against sales proceeds in determining the capital gain or loss.
- The transaction costs of buying and selling are not an allowable deduction against income but are taken into account in determining the capital gain or loss.
- A capital loss from the sale of shares can’t be offset against income from other sources, but can be offset against capital gains or carried forward to offset against future capital gains.
- If a capital gain is made on shares held for more than 12 months a discount of 50% is available thereby halving the taxable amount of the capital gain, however before applying the discount, capital gains must firstly be offset against any capital losses incurred in the current year and capital losses carried forward from prior years before applying the 50% capital gains discount to the remaining capital gains balance.
- Interest on loans funding share purchases and all other expenses incurred in relation to share investing are claimable at Item D8 Dividend Deductions.
Franking tax offset and the holding period rule
All investors, but particularly share traders need to be aware of the holding period rule which requires you to continuously hold shares ‘at risk’ for at least 45 days not counting the day of acquisition or disposal in order to be eligible for the franking tax offset. Fortunately however, there is an exemption available and the 45 day rule will not apply if your total franking credit entitlement for the year is less than $5,000. This is roughly equivalent to receiving a total of fully franked dividends for the year of $11,666 assuming a corporate tax rate of 30%.
If this rule applies to you and your franked dividends exceed $11,666 then you cannot include the franking credits at item 11 U in your tax return for those dividends failing the 45 day rule.
Next month Part C of this series will outline tax saving options and strategies for reducing the overall impact of income tax and capital gains tax on investing in shares.
Disclaimer:
The content of this article is not intended to be used as professional advice and should not be used as such. Some aspects of this topic can be quite complex, so if you are a share investor or contemplating investing in shares you should consult a registered tax agent, a financial advisor or your broker.
Brian Spurrell FCPA CTA Director, Personalised Taxation & Accounting Services Pty Ltd. 0412 011 946
Email bspurrell@ptasaccountants.com.au,
Web www.ptasaccountants.com.au