Investing in shares

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sharesDividends (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.

Obtaining shares

You can obtain shares through:

  • buying them
  • inheriting them
  • being given them (receiving them as a gift)
  • them being transferred to you as the result of a marriage or relationship breakdown
  • an employee share scheme
  • a conversion of notes to shares
  • demutualisation of an insurance company with which you have a policy
  • bonus share schemes of companies in which you hold shares
  • dividend reinvestment plans of companies in which you hold shares
  • mergers, takeovers and demergers of companies in which you hold shares.

 

Tax obligations when obtaining shares

The key tax issues you need to be aware of 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 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.

 

Owning shares

When you own shares, there are tax implications from:

  • 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
  • transactions the company you have invested in undertakes, such as mergers, takeovers and demergers.

 

Tax obligations when owning shares

The key tax issues you need to be aware 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.
  • in some demergers, you may be eligible to choose to rollover any capital gain or capital loss you make. This means you do not report 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.
  • 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

How do I dispose of shares?

You can dispose of your shares in the following ways:

  • selling them
  • giving them away
  • 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 goes into liquidation.

 

Capital gains and losses when disposing of shares

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)

You have a capital loss on your shareholding when an administrator or liquidator makes a written declaration 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 if:

  • you have owned your shares for at least 12 months, or
  • you gifted them to a deductible gift recipient, provided they are valued at less than $5,000 and you acquired them at least 12 months earlier.

If you are subject to a capital gains event through your shares you may want to read the Taxwise Australia article Capital Gains Checklist which will determine if you are subject to a capital gains event.

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Warren Kruger

Specialist Tax Consultant - “Helping YOU Pay The Correct Tax And Not A Penny More”. My story starts on Christmas Eve, back in 1983 in South Africa.

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