Your share portfolio and tax

Dividends |  Disposal defined |  Dividend imputation |  Deductions |  Foreign investments |  Other deductions |  Dealing with losses

There's a warning that sharemarket investors will hear at least once in their lives in some form or other ­– base decisions on investment merit, not on trying to save tax. It's a maxim that has been put a more colourful way: Don't let the tax tail wag the investment dog.

Wise words; but don't wipe 'tax' off the whiteboard just yet. It is still an important element to factor into your total investment outcome.

There are taxation consequences for everyone who earns assessable income, and that includes profits made from sharemarket investments (both from dividends and increases in market value that have been realised through share sales).

If you buy and then sell a parcel of shares and they have gone up in price, you will make a capital gain. Tax will usually have to be paid on this gain. And if in the interim you have received dividends on those shares (your share of the company's profits), there may also be tax to pay. However the amount of tax payable (or refundable) depends on how much tax, if any, the issuing company has already paid on the underlying profits from which the dividends are paid – that is, whether they are unfranked, partly or fully franked dividends. (See more on dividends and franking below.)

Dividends
You will be required to declare all dividend income on your tax return, even if you actually did not receive the dividend in cash and used it to buy more shares (through a dividend re-investment scheme for example).

In any financial year there can be both interim and final dividends, and they may not necessarily be paid but 'credited' to you. The shareholder dividend statement from the issuing company will have all the details you need.

Even if you re-invest any dividends to buy more shares, make sure you keep records of market value, as this will probably be needed when you eventually dispose of them for capital gain (or loss) calculation purposes. Any other payments or benefits from a company of which you are a shareholder (and, in some cases involving an unlisted company, an associate of a shareholder) can potentially be treated as though they are dividends, and therefore be taxable.

Disposal defined
Disposing of shares includes selling them of course, but for tax purposes, a disposal can also happen under other circumstances, such as when a company goes into liquidation or is subject to a takeover. Disposal by whichever means will result in either a capital gain or a capital loss. Broadly, this is the difference between what you had to pay to get the shares and what you get when you dispose of them (in whichever manner), and comes with CGT implications.

A liquidator can declare shares worthless (so the capital loss, which can at least be used to reduce capital gains made on other investments, might be some consolation), and transferring shares into someone else's name will be treated the same as an on-market third party sale, provided that a genuine sale occurs. But if you've owned your shares for at least a year, there is a tax concession available to individuals whereby 50% of the capital gain is tax-free – this is known as the CGT discount.

Dividend imputation
Dividends are taxed under an 'imputation' system. This just means that the dividends are paid out of profits on which the company has already paid tax, and the company attributes or assigns that underlying tax (imputes it) to the receiving shareholder. The dividend comes with a 'franking credit' representing that company tax paid, which the shareholder can use to offset their own tax liability.

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