Profits or returns you make on your Investments usually become part of your income for tax purposes. Many expenses relating to your Investments 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 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.
How tax applies to different types of Investments :
Investing in bank accounts and income bonds
Interest from a bank or other financial institution is part of your assessable income for the year, even if you are a foreign resident for tax purposes or the account is in a child’s name.
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 wouldn’t 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 and other investment bodies report to the ATO the interest they pay to account holders and investors. The ATO match this information with the amounts people report in their tax returns to ensure that all income is being declared. If the ATO find a discrepancy, we do adjust returns and penalties can apply.
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 account and distributes regular bonuses. For tax purposes, these bonuses are treated in the same way as interest.
If your bank doesn’t have your tax file number (TFN) it will withhold tax from your interest at the highest marginal tax rate. You can claim a credit for the amount of tax withheld when you lodge your tax return.
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.
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.
Financial institutions automatically withhold tax from interest earned on accounts held by foreign residents. If you’ve given the financial institution your overseas address, the tax will be withheld at the rate of 10%. Without your overseas address tax is withheld at 49%.
Investing in shares
Dividends (income from shares) are considered income for tax purposes. There are also other tax implications of 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.
Managed investment trusts
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
- managed fund, such as a property trust, share trust, equity trust, growth trust, imputation trust or balanced trust.
If you are an Australian resident with overseas assets you need to include any capital gains or capital losses you make on those assets in 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 foreign tax on that income, you may be entitled to an Australian foreign income tax offset.
Does investing interest you? If you are considering investing in property read the Taxwise Australia article about investment property repair and maintenance expenses.