Tax Time 2013 – Shares, Franked Dividends and Options

posted on July 14th, 2013 by Bellmont Research Team

wide-ato-620x349Whether you’ve bought or sold shares this financial year or received some dividends along the way, here are a few insights the Bellmont Research Team would like to share with you that could potentially make a big difference to your bottom line come tax time.

We’ve collated and put together a few key points that as an investor, you should be aware of when is comes to tax and your shares

Capital Gains Tax on your Shares

CGTThe most important tax events occurs during the close or sale of your shares, in particular, if a profit has been realised. After taking into account the brokerage and cost of the shares, if a profit has been made, then a capital gains event has occurred and is considered part of your taxable income.

Capital Proceeds – Cost Base = Capital Gains

Discount Capital Gains

There is leniency however if you are a long term investor, and you’ve held on to the underling shares for more than 12 months, then you are eligible for ‘discounted capital gains‘, granting you a 50% discount on your gains and is great reason to hold on to your shares if your close to that 12 month holding period.

Capital Losses

If as an investor you’ve incurred some capital losses this year, those capital loss can utilised to offset any of your capital gains that you may have incurred throughout the financial year. Unlike capital gains however, which must be realised at the end of the financial year, capital losses can be rolled forward and deducted from any CGT asset gains you might have in the future, including gains from other assets and real estate.

For instance if you incurred a loss 2 years ago and incure a capital gain payable this financial year, then you can reduce your tax through rolling those losses forward and offsetting both. Unfortunately you cannot offset those capital losses against realised capital gains and not your main taxable income.

Contract for Difference (CFD’s)

CFD’s as well as many of the financial instruments available are also treated as CGT assets, and should be treated similarly to your shares when it comes to taxation. Essentially if you have invested in a financial product and has realised a net profit, then it should be treated as a CGT asset and taxed accordingly. It’s important to note that any capital losses within these financial derivatives can also be used to offset any capital gains you might have in your share portfolio or any other CGT assets.

Tax on Dividends

dividendsDividends are generally paid out to investors twice a year and in terms of triggering a tax event, are only taxable when you receive either a share reinvestment plan or have the dividend funds deposited into your account. When you receive a dividend, the next thing you need to know is whether they are franked or unfranked and what that means to your tax return.

Franking Credits

Companies pay tax on their profits at a marginal company tax rate of 30% and as those profits are then paid out to shareholders. To avoid being double taxed, the dividends you receive as a shareholder are either franked or unfranked. With franked dividends, you receive a payment as well as the the underlying franking credits representing the amounts of tax paid by the company of the underling shares. These franking credits can then be used to offset against your taxable income.

Cash Dividend x 30 ÷ 70 = Franking Credit

For example, if you received $10000 of fully franked dividends, and the underlying franking credits amount to $4285, when you lodge your return, you would declare your taxable income as the dividends plus the franking credits ($14285). You would then also claim a tax deduction of $4285 to account for your franking credits. If you are a low income earner and your marginal tax rate is below the 30% company tax rate, you’ll receive a refund for the excess net tax payable.

45 day rule

To be able to claim the franking credits, the ‘holding period rule’ requires you to hold shares ‘at risk’ for at least 45 days. Now what this means it that if within 45 days, you’ve sold the underlying shares, or you’ve entered into an arrangement to minimise your potential losses, you may not be able to use those franking credits in your tax return.

If however you don’t hold the shares at risk for the required period, you may still be entitled to claim those franking credits, provided the franking credits amount to less than $5000. These are all considerations to be made if your either claiming your franking credits, or if your considering selling your shares close to that 45 day mark.

Remember to quote your TFN when you buy your shares, otherwise your dividend payments will be taxed at the highest tax bracket

Options

Income derived from the writing of options should also be factored into your taxable income, however the income or expenditure from premiums are usually not deductible until the gains or losses are realised. Upon the expiration or strike of the option, buyers of options would have to factor both the cost of the  premium and be subjected to any capital gains or losses when exercising the option.

Bellmont Research Team

 We would like to stress the information provided is for informative purposes and any advice should be consulted with your accountant to assess whether it applies to your individual financial situation.



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