Many Australians are forgetting to consider their investments when it comes to tax time. You risk having your tax refund delayed or having to pay more than expected if you forget to report your investment gains. Despite the financial challenges brought on by the Covid-19 pandemic, investment in exchange-traded funds (ETFs) and micro-investment platforms has surged since last year. The ETF sector has grown by $20 billion this year to a worth of an estimated $100 billion on the ASX.
ETFs are a form of relatively safe investment. ETF’s are a combination of shares that tend to offer a diversified portfolio when bought. Young investors have been a significant driving force behind this growth, with 53% of new investors in the last two years being under the age of 39. The draw for many young investors has been the low cost of entry. With just small cash investments, investors purchasing an ETF can acquire a ‘basket’ of various shares from listed companies.
According to ATO assistant commissioner, Tim Loh, many first-time investors did not seem to understand their tax obligations and was leading to refund delays. He also noted that they were more prone to making mistakes when lodging taxes and did not keep good records.
The ATO confirmed that an estimated 5.8 million transactions pertaining to 612,000 taxpayers would be automatically pre-filled based on data submitted by the Australian Securities and Investments Commission (ASIC), share registries, brokerages, and exchanges. This data includes dividend payout amounts and share value prices at the time of purchase and sale. Taxpayers are however, still required to ensure all relevant data has been properly captured.
ETFs provide investors with the option to reinvest their distributions, rather than receive a payout. The distribution must however still be declared. Loh noted that many investors were not aware that they must still pay taxes on distributions and dividends, even if they opted to automatically reinvest.
Another mistake young investors were making was reporting paper losses as actual losses. This means they were reporting a capital loss on a share they still owned due to a dip in share value, yet had not sold it yet. They were also found to be offsetting said losses against other incomes. The ATO has affirmed that capital losses can only occur when the shares have sold and can only be offset against capital gains, and not any other kind of income.
Loh noted that that the ATO had systems in place to capture such claims and those penalties were a possibility for those found to be deliberately trying to mislead. He reiterated that while tax on investments could be complicated, good record-keeping was a good way to keep on top of obligations. He emphasised such data as dates, share price at the time of purchase and sale, and details of taxable events as being essential.
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