Episode 29: Investments and Tax!
July 26, 2021
There are so many options when it comes to investing your hard earned cash and often it's so exciting setting up a new investment that we don't thinking about the boring stuff like tax! Tax on the income we are going to earn as well as the tax implications for selling the investment. In this episode we walk you through all of tax things you need to consider for your investments. Whether they are Australian based, overseas, standard shares or fancy new Crypto investments. If you are an Australian resident you will be taxed in Australian on your worldwide income, so listen in and walk away with a better understanding on how tax might impact on your investments and some of the questions you should ask your accountant or advisors when considering different types of investments.
Podcast Transcript Available Here
Duration: 21:39
Sarah Eifermann: Hello Hello everybody. Trudi Cowan: And welcome to tax season. Sarah Eifermann: She didn't say Welcome back. Trudi Cowan: So you don't get me singing the Welcome Back Kotter theme song today. Sarah Eifermann: Yes. Good. Today we are talking about investments and tax. Trudi Cowan: Which is very timely because we are literally in the middle of tax season. Yeah, it's tax season for everyone. And when we talk about investments, we are talking very broad shares, dividends, rental properties, cryptocurrency, whatever it is that you managed funds, whatever it is you might be choosing to invest your money into. Today we're going to have a bit of a chat about the tax implications of having those investors. Sarah Eifermann: We're not talking about whether or not you should invest. Trudi Cowan: No, Sarah Eifermann: Just what happens as a result of investing when it comes to tax. Trudi Cowan: and look there are two broad categories that we look at in terms of your tax on investing. The first is the return on your investment. So the interest, the dividends, the rental income. And the second is the gain that you hopefully make when you do sell that investment. Yes, for tax money, they're treated a little bit differently so we're going to have a look at both of those categories. So, why they even tax? Sarah Eifermann: Yes, because often I get the question, but it's an investment, why am I paying tax on it? Trudi Cowan: And because its earnings, its income. Sarah Eifermann: Income. Trudi Cowan: So, the way that I look at it is that you own your wages in return for your time, your labor, you earn interest for locking your money away in a bank account or dividend, for investing in a company, it is a return on your resources, then your capital your cash, and its considered as income. Sarah Eifermann: And this type of investment may not be you physically putting labor in you might be using your capital to do the earnings, but that it's still related to you and your personal position on that. We/re going to talk about personal tax returns today, aren't we? Trudi Cowan: Yeah, just personal so this is what's going in your personal return and what you've invested in your own name. Sarah Eifermann: Yes, okay. Okay, fantastic. Trudi Cowan: So, let's start with the easy one. Interest. Sarah Eifermann: Why, no, let's start with why do I have to pay tax. Trudi Cowan: Because it's earnings and in Australia, we pay tax on all of our earnings, our worldwide earnings. Sarah Eifermann: yeah, that's one that's often forgotten. Trudi Cowan: Yeah, so things like interest, Sarah Eifermann: Get included as income Trudi Cowan: In your personal tax return and look most people would have seen that even if it's just the 10 cents, they got on their bank account, they would have seen that that coming into their personal account. Sarah Eifermann: It comes through automatically as well. Right. Trudi Cowan: Yeah, as long as your bank is doing the right thing and reporting that information to the HEO at the end of the year. It should be coming through. Yeah, automatically, and similarly dividends, straight into personal return again listed companies are required to report that information to the HEO, and even small companies are as well it’s just through different forms and sometimes types. Sarah Eifermann: Or a bit longer? Trudi Cowan: But certainly if you have listed shares that information should be coming straight through to your return. Sarah Eifermann: So it can I not pay tax on my earnings. Trudi Cowan: No. Sarah Eifermann: Why not? Trudi Cowan: Because it's part of your assessable income, which is included in Sarah Eifermann: And if you’re making money, you pay tax. And the assumption here is because gearing often comes up in existence right so gearing would still apply and we're assuming for this position, that it's positive therefore they're earning. Trudi Cowan: That's right. So when we talk about gearing, we're talking about your expenses against your investment income, most people would have heard the term negative gearing, which is when your expenses outweigh the income that you're earning off that investment. So it's as you say, we're assuming here that we're positively geared, and the income is outweighing any associated expenses. Sarah Eifermann: And so is the rate, the same on this, as it would be if it was income tax. Trudi Cowan: Well, it is the income tax. Sarah Eifermann: What? Trudi Cowan: It's the same, rate of taxes you would pay on your wages, it just gets Sarah Eifermann; Because its income Trudi Cowan: That's income and it gets added and pooled together with your wages plus your interest partial dividends, all the other things together and you pay at your particular marginal tax. Sarah Eifermann: Yeah, so, I mean, we kind of said this already but often the question is, but how will the ATO even know about it? Trudi Cowan: Yeah, as we mentioned, a lot of this information is reported to the HEO. Yeah, through various reports and mechanisms, we're even finding people that are selling property, that information is coming through to the HEO that this individual has sold a property, and this is how much they received. Sarah Eifermann: So State Revenue Office or land titles? Trudi Cowan: I'm assuming so. Sarah Eifermann: Yeah, that's how it's connecting it in. Trudi Cowan: Yeah, that insulation has come through and we're seeing lots of different things come through, interestingly, not quite an investment income but I'm even seeing reports that this person's received this much money by after pay. So there is lots of information being reported to the Sarah Eifermann: Like in PayPal, Trudi Cowan: As in they've received, Sarah Eifermann: So I pay you money? Trudi Cowan: Yep, Sarah Eifermann: Just through that payment gateway, and it's now coming up on the tax returns, should this be included? Trudi Cowan: Yeah. So, there are a lot of bodies around that are required to report this information. Sarah Eifermann: Yeah, and with open banking and comprehensive credit reporting again. Yeah. You can't hide anymore. Trudi Cowan: Yeah, so when it comes to these investment-type things, yes certainly listed companies, banks are definitely required to report this information through to the HEO. So when we talk about dividends, I just want to talk about the tax on that a little bit more because there are two types of dividends, you can receive. Sarah Eifermann: Go into those. Trudi Cowan: Okay. The two types you can get an unfranked dividend, or you could get a franked dividend. Okay. Now, the difference between those is unfranked dividends are representing profits of the company that they haven't paid tax on. Sarah Eifermann: Let's take a step back, what a dividend paid for, dividends as a bracket? Trudi Cowan: Dividends is a company distributing its profits out to the shareholders, right. Okay, Sarah Eifermann: So that's why they can be frank or unfranked? Frank means taxed or not taxed. Trudi Cowan: So frank is taxed, the company has already paid tax on that profit. Yeah, unfranked means the company hasn't paid tax on that profit. Sarah Eifermann: So if I got an unframed dividend. I need to pay the full tax that's owing according to my tax bracket on that dividend. Trudi Cowan: That's right. Okay, if you receive it unfranked dividend, let's put some numbers around it to make it a bit clearer. The company's made $100 of profit. Yep, they've paid $30 of tax on that shop, so they will pay you a $70 dividend because that's all that's left, but it comes with a franking credit. Sarah Eifermann: Yes, okay, because the tax has already been paid on the $100 Trudi Cowan: Right, so that will come with a $30 franking credit. When it comes to your tax return, you include $100, as income is the full $100 of profit. But then you will receive a credit for the $30. So what ends up happening is that you only pay the difference on that. Sarah Eifermann: Now for anyone listening going my head just exploded. Don't worry Trudi had to draw me stick figure diagrams, about four years ago to explain this concept to me as well. So, Trudi Cowan: So to put a little bit more around it if you're paying tax at 40%, right $30 has already been paid. So 30% has already been paid so you only pay an additional $10 or 10% tax on that dividend. Sarah Eifermann: So you keep $60, or 60% you pay, another 10% and the rest has already been paid to you. Trudi Cowan: On the flip side, If you only pay tax at 20% The company's paid 30%. Sarah Eifermann: You get a refund. Trudi Cowan: You actually get a refund of the difference is the $10 or the 10% Right, or it might get used to offset other income that you've got included in your return. Sarah Eifermann: And that for anyone curious is why there was a debate at the last election about the franking credits proceeds scandal and taking them away from self-funded retirees because they planned the whole retirement based on getting refunds that they now were no longer eligible to receive which means they had to go on the pension, yes, to have a life. Trudi Cowan: So, look, it's the way the system is set up is that the end individual should only be paying tax on those company profits at their personal rate. Yeah, it shouldn't be the company paying 30%, And then you are paying an additional. Sarah Eifermann: Yes, double-dipping. Trudi Cowan: 30 or whatever, you would end up with very little of that company profit if that was the case. Sarah Eifermann: Okay, what about if it wasn't shared, what if I had an overseas property. Okay, so an overseas property actually works the same way as if you had an Australian property. Sarah Eifermann: Does it really? Trudi Cowan: You need to report your rental income. Sarah Eifermann: Okay, Trudi Cowan: You need to report your mortgage interest, and any other costs associated with holding that property. Yeah, and the net difference is your income for tax purposes. Sarah Eifermann: As a loss or a gain in the same way as if it were an Australian property neutrally negatively or positively geared. Trudi Cowan: Foreign losses are quarantined. I can only be offset against foreign income in most cases. Sarah Eifermann: For future income. In that instance. Trudi Cowan: In most cases, yes and it will go in a different box on your tax return, it will go in the foreign income, and not in the rental income box, but if you do have property overseas, you should still be reporting that income in your Australian Tax Return, same, if you have other overseas investments so if you've got shares on the NASDAQ or some overseas bank accounts because you used to live overseas and you just haven't quite. Sarah Eifermann: When you have stocks and bonds, Trudi Cowan: Closing down, yeah, if you're an Australian resident, you pay tax on your worldwide income. So that includes dividends that you've earned from foreign, Sarah Eifermann: It is really important that if you've gone overseas for a prolonged period of time and you're not a resident here at the time you may have taken a contract or short contract overseas that you make sure that your residency status is accurate, for what you're doing. Trudi Cowan: If you are planning on going overseas, speak to an account. Check your residency status. The rules are actually really complex around whether you are an Australian resident or not and it varies for Australian citizens and non-Australian citizens coming into Australia the rules work slightly differently. So if that's you and you're moving around, definitely get advice on that, and what needs to still go into your Australian return. The other thing to be aware of around foreign investments is that potentially you've paid some foreign tax or yes or no. So for example, you might have some shares in an American company, and then paying those shares to you the company might have been required to withhold some tax Sarah Eifermann: In that in that jurisdiction? Trudi Cowan: In that jurisdiction aptly called withholding tax, yeah, you might be able to receive a credit for that foreign tax paid. Okay, okay, so it is important. If you have the foreign income to also be picking up any foreign tax he may have paid, is that there'll be a credit for you here Australian too important to pick up. Sarah Eifermann: Okay, fantastic. So, often though when we're talking investments in tax the main one that people misunderstand or don't know about is Capital Gains Tax or CGT. Trudi Cowan: That's right and the biggest myth about CGT is that it is a separate tax, it actually falls within your income tax, it's more a subset type of income tax. It's included in your personal return, and the capital gain that you include is just added to your wages and interest and all of your other income to get to your total assessable income number. Sarah Eifermann: Yeah, okay. Okay, so one of the interesting questions we had is when the CGT gets paid or what's payable on? Trudi Cowan: Okay, so there again, disclaimer, really complex rules, there's a whole series of things but if we keep it simple in terms of investment, let's go with a share. Yeah, okay, your capital gains tax becomes relevant when you’re selling shares, so capital gains are a really well-described title because it's on the game of the capital for the price that you sold it on sale and the timeline that you've had it. So if you have a $100 Share and the same reason. So, but you purchased that investment for $50 You've had a $50 gain at a simplistic level that is exactly how you would calculate it. Yeah, okay, and that $50 would then go into your tax return as capital gains, yeah. Okay, there's a whole Sarah Eifermann: Income tax would be payable on the capital gain. Trudi Cowan: Yeah, and look there's a whole bunch of other rules around, if it's your primary residence, you might not pay tax, you can get discounts on the gears yeah let's just ignore that for the moment and just talk a bit more broadly. So it really is that gain, that's what's important. Sarah Eifermann: So it's similar in some ways if you're looking at it to being paid a bonus. Trudi Cowan: Yep, because that would still go into your taxable income. Yeah, and you would pay tax on it. Yep, it just everything accumulates. Sarah Eifermann: Yes. As income. Trudi Cowan: Yeah. Few important things to think about though when you're looking at CGT. Number one, capital gains tax on the sale of an investment is actually triggered on the contract date, and not your settlement date. Sarah Eifermann: Yeah, that's a super interesting one. Trudi Cowan: If you think of selling a house, if you sign a contract, and it becomes unconditional so, you know, the bank's approved your money, it's all going ahead on, let's say the 20th of June. Sarah Eifermann: Yes, in Australia, on the 20th of June, because our financial year ends on the 30th. Trudi Cowan: But you don't settle until July. You might think well I didn't get my money till July, I don't report it until July. But no, no, our rules actually go off your contract date your contract was in June. So therefore actually falls into that previous financial year. Sarah Eifermann: So, again it shows my tax planning, and life planning all come together, as super important because if I was retiring. And I was retiring in the financial year that ended on the 30th of June, my income tax would be higher because I would have a tax bracket based on my total income. Trudi Cowan: Oh yeah, I would definitely have advice on selling Sarah Eifermann: And wait until the new financial year. And sell it, in that financial year for that exact reason. Yeah, and if it weren’t June if it were December, you would have told me to wait to sell until the July of the next year. Yeah, if I wanted to legally reduce my taxable income on that capital gain. Yeah, so it's really important, the one that piqued my interest in this topic to share with you is about cryptocurrency. Yeah, and the implications that go with cryptocurrency, because if you buy into cryptocurrency, make it again. Yep. Because you sell it. And then you buy-in and make a loss, you still owe tax. For, the income on the gain. Yeah, so for these because crypto is so volatile., some people are buying in at five grand. Yep, and it's going up to 50 or 100 grand some people it's going up to a million, depending on how long they've had it for right and then they've sold it. Technically speaking, they could owe hundreds of 1000s of dollars, hundreds of 1000s of dollars in tax. And then they may have reinvested that money into another crypto. And they've lost it. Trudi Cowan: Yep. And what's actually really important to note about cryptocurrency, in particular, is that each currency is a different type of asset. And that's where people are getting tripped up. Sarah Eifermann: So if this was a house, and I had a house. Trudi Cowan: That you shared as an example. Okay, so if I had BHP shares. Yep. And I said I don't want to have BHP shares anymore, Sarah, I'm going to trade with you, you've got lab shares, let's just trade, yeah, technically what we've both done is just sold a share, and bought a new one. Sarah Eifermann: In the same asset class? Trudi Cowan: Same asset class but we've bought a new asset. Yes, completely different asset, that's the same as you switching from one cryptocurrency to another, you've sold one, and you've bought another so that sale is going to trigger a capital gain for you. Sarah Eifermann: So, crypto is no different from shares, then? Trudi Cowan: Yeah, it's each currency is a different type of different subset called crypto. Sarah Eifermann: Yes, it's a different brand name right, it's the same as NAB versus Trudi Cowan: BHP or whatever it is, so you don't have to have actually cashed out back to your bank account, that's not what triggers the gain. No, it can be just switching from one to another that can trigger that gain for you. Sarah Eifermann: Because it's still the sale and purchase. Trudi Cowan: Yep, with the change of asset. Yeah, that's the mind-blowing stuff guys so if you're out investing in Crypto, please go and get some tax advice. Trudi Cowan: Definitely, Sarah Eifermann: Because we're starting to see people ending up with a huge taxable income as a result of not understanding that the trading changes of the asset class, Trudi Cowan: And the HEO is actually watching crypto very closely. At the moment, and we were talking earlier about people having to report certain things to the HEO, that's certainly starting Sarah Eifermann: Its automatically magically happening, Trudi Cowan: Suddenly happening as well around cryptocurrencies so the HEO are aware of who is investing in Yeah, and they will be expecting to see gains included in people's returns. Sarah Eifermann: Yeah, there was one scenario that I saw where the bloke had made a million dollars and sold it and then lost a million. Yeah, and his taxable bill really huge. Well yeah, highest tax bracket right. What does that work out as a guess off the top of her head? Trudi Cowan: That would have been at least 45%, Sarah Eifermann: So $450,000 Trudi Cowan: Which he doesn't have anymore so, really important if you are in crypto make sure you're getting some advice. Sarah Eifermann: Massively you need advice on it 100%. So, anything else Oh yes, how long do you have to keep the records on Capital Gains Tax events? Trudi Cowan: Well, it's actually interesting, capital gains, you keep the records from the time that you sell. Okay, so normally we would say Sarah Eifermann: The contract date or the sale date? Trudi Cowan: So let me get to that, normally, normally, broadly what we would say is you need to keep your records for five to seven years Yes, right. But the difference with capital gains is that it's what people think about from when they bought the house. It's not for when you bought the house, the five or seven years run. It's from when you sell the house the five or seven years run. Right, so it may be that you actually need to keep that purchase contract for 20 30 years. Yes, right, because you need to look at the disposal timing, not the purchase timing right. Sarah Eifermann: Okay. And is it the same for shares, as it is for the property? Trudi Cowan: That's right, looking at the sale point. Okay, Sarah Eifermann: So, record keeping is the same then, really, yeah, that's everything pertinent to Trudi Cowan: Yeah, it's just the timing of it, right, that you really just make sure that you're looking at the five or seven years running from the gain capital gain. So, when that's included in your return, not from the purchase date of buying that investment. Sarah Eifermann: So one of the last things that commonly get obviously you know, asked in this space is managed funds and how they play into the income tax taxable positioning? Trudi Cowan: So look managed funds typically have investments in lots of different things, so they're receiving lots of different types of income they might be receiving some interest in dividends, they might be receiving some capital gains themselves as they buy it and sell it. So if you have managed investments are managed funds, you'll notice that at the end of the year they send you a tax statement. And that actually splits out the different types of income that you've received because you actually need to report it to the HEO, based on those categories. Right, Yeah, some of it does get lumped as other income, but you do need to split out your franking credits on your dividends to make sure you're claiming their credit correctly, you do need to split out the capital gains to show that. Yeah, separately as well. So, it is important to make sure that you're checking those statements and checking that you're including that information in your returns in the appropriate boxes. Sarah Eifermann: Yeah. Wow. So if your head is now exploded properly. I highly recommend you rewind. Go back to the start of this episode and play it again and maybe do that a third time if you need to. Otherwise, reach out and ask Trudi for some assistance in understanding how it might impact your position. Trudi Cowan: With your particular investments. Sarah Eifermann: With regard to your income tax, and have a chat with her, you can hit her up on email via her website, she's got a new one. Or via here socials as well. So again if you got any questions or any other topics, you'd like to hear us cover please shoot them through you can use the link and anchor. Or again, send us a private message. Absolutely, we're pretty responsive on those channels so lovely. Trudi Cowan: Happy to have a chat. Sarah Eifermann: So I think that's probably enough for today on that topic. Trudi Cowan: That is it, you've been listening to financial FOFU and I'm Trudy Cowan. Sarah Eifermann: And I'm Sarah Eifermann. Have a great day everyone. Trudi Cowan: Bye.———————-
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