How Do Investments Affect Taxes?

Over 6.5 million Australians invested in stocks listed on the exchange, private companies, Self Managed Super Funds (SMSFs), cryptocurrency, and more. Chances are, you may be among them. If that is the case, you must be up to date on information regarding investments and your income tax when lodging your tax return.

What Investment Income Must I Declare?

One of the first questions taxpayers ask is, “What income do I declare on my taxes?” The list is fairly long and involved, but the condensed version of the Australian Taxation Office’s guidelines goes as follows:

Interest Income

If you receive an interest payment for any holdings, this is income, and you must report it on your income tax return.

This includes:

• The interest you have earned from a financial institution through accounts and term deposits
• Interest from any other source, including penalty interest received on an investment
• Life insurance bonuses (to learn more about life insurance and or insurance for a wide range of occupations and scenarios, check out the resources by All Trades Cover)
• Interest from foreign sources
• Interest from your children’s savings accounts IF:
  • You spend or use funds in the account
  • Open and operate an account in your child’s name, and the money belongs to you

Term Deposits

The interest on term deposits is declared the tax year the investment matures. If you roll over your investment, you must report the amount of interest earned as of the rollover date.

Dividend Income

Regardless of whether your dividends come from money, shares, or other property, you must declare the amount earned. Your dividend may come from several sources such as:

• A public trading trust
• Corporate limited partnership (in the form of a distribution)
• Corporate unit trust
• Listed investment company

Income From Investing in Rental Property (Domestic or Foreign)

You are obligated to declare the entire amount you get from rent or rent-related payments. If you receive goods or services instead of rent money, you must calculate a value and declare it as income. Examples of rent-related payments include:

• An insurance payout to compensate for lost rent
• Letting or booking fees
• Retained rental bond money
• Reimbursement for a deductible payment
• Rent you receive from renting a room or unit on a short-term basis as a part of the sharing economy
• If you are a co-owner of an investment property, you only need to declare your portion of the monies received

Managed Investment Trusts

You have to report any funds received from a trust investment product. This includes income from:

• A managed trust such as an equity trust, growth trust, property trust etc
• cash management trust
• money market trust
• mortgage trust
• unit trust

Capital Gains

Upon the disposal of a capital asset, you must report any capital gains or losses. Aside from selling an asset, a managed fund or another unit trust can distribute a capital gain to you.

Capital gains (or losses) are calculated as follows:

• The amount you paid for an asset minus the amount you receive upon its disposal

You should note that your capital gains tax is a part of your income tax. It is not a separate tax. You will report gains and losses on your income tax forms.

Income From Cryptocurrency Assets

Around one in five Australians own some type of cryptocurrency. If you are an owner, you need to ensure that profits from your crypto are recorded and taxed correctly. This is vital because the ATO now matches transaction data from digital exchanges and will be aware of any recording mistakes you may have made.

Your crypto asset income is taxable under the category ‘other income’ in Australia. Any rewards you may get from crypto, such as airdropped coins, must be valued at the time they are received according to ATO guidelines and reported as income based on that value. Make sure to use the correct valuation method specified by the ATO to accurately report these amounts.

Other cryptocurrency rewards must appear on your tax documents. These include:

• Agent nodes and guardian nodes
• Premium stakers and other entities performing comparable roles
• Proof of authority and proof of credit mechanisms by validators

There is another point worth mentioning regarding cryptocurrencies and your income tax. Any profits you make from the sale of cryptocurrency are capital gains and thereby subject to the same conditions as any capital gains taxable income.

Exchange Traded Funds

Even though exchange-traded funds (ETFs) continue to grow in popularity, working out the tax on these funds is complex. You must report the various distributions separately on your tax return. The same is true for any capital gains you may have received.

Are There Any Tax Deductions I Can Take for My Investments?

The list of reasons to pay more income tax because of your investments may seem somewhat lengthy. However, the ATO does allow tax deductions on the cost of making money by investing. The following is a list of several tax deductions you can make because of your investments:

• Accountant fees for your investment portfolio
• Interest on funds you borrowed to buy investment shares
• Ongoing account management fees
• Retainers paid for investment advice
• Interest on funds borrowed for related investments
• A percentage of borrowing costs
• Part of the cost of investment journals

While the ATO previously allowed deductions for travel expenses related to inspecting rental properties, these deductions have been restricted since 2017. However, you may still be able to claim travel expenses for attending seminars or educational events directly related to your investment strategy, but this is subject to specific conditions.

Making sense of how your investments impact your income tax can be tricky. And can add to the stress of lodging your tax return. If you are unsure about how to proceed, you may want to reach out to professionals who can lodge your taxes. The experts at My Tax Refund Today could assist you in saving time, stress, and possibly a fine from the ATO if you did not get everything correct.