Tax tips all investors should know to help prepare tax return

If you’re building up an investment portfolio, it’s essential to fully understand your tax position both in terms of how your profits will be taxed and what deductions you can claim.

Here’s H&R Block’s list of the top tax tips you need to be aware of. 

Declare all income

Generally speaking, the sale of investments including shares (which are held for long-term gain rather than short-term profit) are taxed as capital gains (with access to the 50% discount where the investments are retained for longer than 12 months).

The income earned from those assets, such as interest or dividends, is taxed as ordinary income.

If you’re regarded as a share trader rather than an investor (ie, your business or occupation is buying/selling shares rather than passively holding them for future gain), profits and losses arising from the sale of shares are treated as income rather than capital.

This means that losses from your share trading can be offset against your other income in the year. The downside is that profits are not taxed as capital gains, so you don’t get the 50% discount.

It can be difficult to persuade the ATO that you are a share trader rather than an investor. They would expect to see a viable business plan combined with share trades which are regular, high in volume and undertaken with a view to short-term profit on each share.

Claim what you’re entitled to …

You’re entitled to claim a deduction for any expense which you incurred in earning your income. So, if you have incurred a work-related expense and you have the paperwork to prove it, don’t hesitate to claim it.

A good tax accountant, like those at H&R Block, will be able to tell you exactly what you can and can’t claim, minimising the chances of an audit at a later date but consider claiming these:

• interest on borrowed funds where you have financed your investment portfolio using those funds;
• borrowing costs incurred in arranging finance, such as legal expenses, loan establishment fees, etc (deductible over five years or the term of the loan, whichever is shorter, unless the amount is $100 or less in which case its immediately deductible);
• bank charges for bank accounts to manage your investment income and expenses;
• management fees or retainers paid to a financial planner (but not the initial costs of drawing up an investment plan);
• the cost of running a home office to manage your investments (including telephone, computer and internet expenses);
• the cost of investment-related journals and subscriptions;
• costs of obtaining tax advice; and
• travel costs associated with your investments, such as trips to see your financial planner or stockbroker, or the cost of attending AGMs.

You can also claim depreciation on any assets used to manage your portfolio, such as computers, laptops, etc, with the deduction apportioned between private/domestic use and use in your investment activity. Immediate deductions can be claimed for depreciating assets that cost less than $300.

But don’t embellish deductions…

You can only claim what you’ve spent. So, don’t inflate deductions in order to get a bigger refund and only claim for costs you can prove you spent, by producing an invoice, receipt or bank statement for instance.

If your deduction claims are found to be incorrect, you will be required to repay the tax avoided, plus pay interest.  If the ATO believes that you have acted carelessly, a penalty between 25% and 95% of the tax avoided may also be charged.

Don’t rely on pre-filled data from the ATO

These days, with the push of a button, you can pre-fill lots of your income information straight from the ATO’s systems. Take care though and don’t assume that income data is correct or complete. Particularly if you are lodging early, always use your own information as the key source data. 

Some people assume that because the data comes from the ATO, it must be right. That’s a dangerous assumption, especially in July and early August.

Don’t forget the basics

Lots of tax returns get held up by the ATO because taxpayers have made basic mistakes like these:

• Name or address changed? Tell the ATO before you lodge your return. If you lodge under different details, the ATO won’t be able to match it with your Tax File Number. Delays will ensue.
• Not included your bank account details? The ATO doesn’t send out refund cheques these days so you need to include your bank details on your return. No bank details, no refund.

Spelling mistake? If you’ve added an extra letter to a key field such as your name, that slip of the keyboard could consign your return to a black hole whilst the ATO tries to manually match your details.

Dividend reinvestment plans

Shareholders are often given the option of reinvesting their dividends into more shares. Be careful though, because the dividend is still included in your assessable income for tax purposes, even though you never actually saw any cash.

Franking credit refunds

If your taxable income is less than $18,200 and you receive franked dividends, you can make a claim to get a refund of the franking credits paid on the dividends you received. H&R Block (NYSE:HRB) can help you fill out the claim forms.

Foreign income

If you own foreign investment assets, such as shares, the income from those assets is still taxable in Australia. You may be entitled to a credit against your Australian tax for any foreign tax paid.

Losses

Current year income losses arising from the negative gearing of investments (ie, where your financing costs exceed the return on your investments) can be offset against current year income.

As you head towards the end of the year, it is worthwhile reviewing your portfolio for shares sitting at a loss. If you’ve sold shares at a profit during the year and are facing a capital gains tax bill, it’s worth considering selling some of the loss-making shares to generate capital losses which can offset the capital gain.

Don’t, however, plan to buy the shares back in the next tax year – that’s a 'wash sale' so far as the ATO is concerned and they can nullify the capital loss as a result.

Get help!

There’s a reason 70% of Australians use a tax agent to prepare their tax return; tax is complicated! Get your tax return wrong and the comeback is on you, either with a lower refund or ATO penalties.  

Most people find it far less stressful to simply pass on all their information to a tax accountant like H&R Block and leave it to the agent to complete their return, safe in the knowledge that the return will be accurate and complete.

An experienced agent will usually be good at sniffing out those obscure tax deductions you didn’t know you could claim so they can often pay for themselves several times over – as the differing refunds sizes above show! Best of all, the tax agent’s fee is also tax deductible.

Author Mark Chapman is director of Tax Communications at H&R Block.