A surge in first-time investors trading shares and exchange-traded funds (ETF) has prompted the ATO to issue a warning on share tax treatment and the behaviour that raises red flags.
The ATO on Monday warned young investors trading ETFs that any attempts to offset capital losses against tax paid on their income – or avoid paying it altogether if the share price of their ETF drops, but they still own the share – will be caught.
The ATO’s warning comes off the back of a wave of new EFT investors who have been afforded entry into the market off the back of the rise of micro-investment platforms popularised by the pandemic.
ASX data shows the Australian ETF sector swelled by some $20 billion in the first half of this year, 20 years after the first ETF product hit the ASX.
The product’s rise has been marked by two components. First, its simplicity: an investor can purchase one ETF, or a “basket”, which contains various shares in hundreds and sometimes even thousands of listed companies.
The second component that has driven their popularity is the emergence of micro-investing platforms that allow investors to buy in with small cash amounts. However, with a lowered barrier of entry has come a wave of tax misunderstanding among new investors.
The Tax Office reminded young investors that capital losses, or “paper losses”, only occur at the sale of a share, and can’t be claimed on shares that only see price dip. They also said that capital losses can only be offset against capital gains, and not other types of income.
ATO assistant commissioner Tim Loh said paper loss missteps have become a recurring trend among enthusiastic young investors but warned that his office’s data-matching capabilities will catch them out.
“Each year we see some enterprising entrepreneurs trying to offset their capital losses against income tax applied to other income such as salary or wages,” Mr Loh said. “Others attempt to offset a ‘paper loss’ against actual income.
“Our sophisticated data analytics are able to spot this and we may apply penalties for investors that have intentionally done the wrong thing.”
The Tax Office also offered clarity on the tax treatment of dividends and distribution reinvestment. The ATO said taxpayers should be mindful of declaring all distributions, even if they don’t withdraw cash from the account, and their shares are redistributed or reinvested.
Mr Loh said dividends and distribution have become an area of ETF tax treatment commonly and increasingly misunderstood by new or young investors.
“Most people recognise that they must pay tax on any money earned from selling shares,” Mr Loh said. “But many don’t realise that tax also applies to dividends and distributions, even if they are automatically reinvested into a reinvestment plan.”
Anything received through a dividend or distribution reinvestment plan is considered income for tax purposes, according to the ATO, and is treated in the same way as receiving cash would be.
Mr Loh said his office is keenly aware of the growth of the market and that these platforms have helped a “record” number of new investors into the market. But, he said, most of them aren’t aware of their tax obligations.
“Unfortunately, first-time investors often don’t understand their taxation obligations, don’t keep appropriate records and are more likely to make mistakes when lodging tax returns,” Mr Loh said.
He said that, while the ATO has access to data from ASIC, brokers, exchanges, and a whole host of other entities, it’s still important that investors double-check their declarations.
“While this data makes tax time much simpler, it is still important for investors to check that all their relevant data has been included,” he said.
Mr Loh said that keeping good records plays a crucial role in getting it right come tax time.
“Taxes on share and ETF investments can be complex, and poor record-keeping doesn’t make it any easier,” Mr Loh said.
“Keeping good records, including dates, prices, commissions, and details of taxable events such as share splits, share consolidations, mergers, and demergers is essential to avoiding trouble at tax time.
“We want to make tax as easy as possible and using data from share trading platforms and SDS from ETFs is a vital way that we help taxpayers avoid simple mistakes.”
07 September 2021
The ATO has long held firm on the principle that rent payments (being a form of occupancy costs) are generally...
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Avi Paluch became a partner in 1975. His client base comprises of professionals in a diverse range of industries, sole traders, national, multi-national and international groups in relation to taxation and management issues.
His clients also include large family groups and high net worth individuals. In addition, he is involved in a range of audits. Avi currently involves himself in various community boards in the capacity of honorary treasurer.
His other interests are being with his family and attending sports events.
Andrew Goldberger joined Guests in 1987. Prior to that he occupied a senior position with the Australia Taxation Office. As well as looking after a diverse range of groups of SMEs and high wealth individuals, Andrew is an expert in taxation. He has been involved in a number of Large Income Tax and State Revenue Audits and provides advice on various technical tax issues and areas of tax planning. Andrew also consults to other practitioners in these areas.
Andrew has also written articles for various taxation publications including CCH and participated in taxation focus groups. He is regularly called on to address various public practitioner groups on taxation matters and has conducted training sessions for CPA Australia.
Ha joined Guests Accounting in 2002 and has earned her position to having been appointed a Partner in the firm in 2017. Since obtaining a Bachelor of Business (with Distinction) at RMIT, Ha has completed an MBA at Monash University and a Masters of Taxation at Melbourne Law School.
Having worked for a number of ASX Listed companies before joining Guests, Ha possesses both robust technical skills in management accounting and turn-around strategies, accounting technologies, together with in depth knowledge in public practice as a tax specialist and business advisor.
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As a firm believer in the importance of life time learning, Ha intends to continue her professional engagement with Australian professional bodies and institutions. Whilst regularly speaking and lecturing at Monash University and Latrobe University, she is actively involved with CPA Australia as an author and a group leader for the “Practice Management” Module of the CPA Professional Public Practice program (Committee Chair – 2022). She is also a member of the Victorian Public Practice Committee CPA Australia, and a board member of KOTO International and ASIF foundation, two not-for-profit organisations in Australia.
Moshe joined Guests Accounting in 1985 and has more than 40 years of extensive experience. He has an indepth understanding of business and is responsible for a diverse group of clients and is in charge of the Superannuation Team and the Audit of superannuation funds.
Moshe’s knowledge in many different areas including business structuring, accounting, taxation, auditing, SMSFs and business planning in various industries enables him to provide advice on ‘the big picture’, taking into account both present and future needs of clients.
Moshe has been involved in various not-for-profit organisations during his career in an honorary capacity. This has given him a good grounding in the corporate governance area. Moshe continues his interest in the new regulatory environment of the not-for-profit sector.
Mory graduated from Monash University in 1979 and joined our team with more than 20 years experience. He is a member of both the Institute of Chartered Accountants and the CPA and a Fellow of the Association of Taxation and Management Accountants.
After more than 18 years experience with a Chartered firm, Mory travelled to the United Kingdom and gained invaluable experience working with various Accounting and Legal firms in London, developing operating systems and in investigative accounting roles.
Mory joined Guests in March 2002 and became a partner in July 2005, specialising in Taxation and Business Services. Mory has also served on the executive of community boards and not-for-profit organisations.
Gary Bryfman is a FCPA, having a Masters Degree in Taxation. His earlier accounting background was in industry, specialising in costing and budget preparations.
He has been a partner of Guests for 31 years. Gary has been involved in a number of Jewish organisations, including JCCV as honorary treasurer; CSG, JEMP and advisor to MDA executive.
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