Bitesize: Tax Time 101

Alec: [00:00:07] Welcome to Bite Size On get started investing. In this series, we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the show notes. 

Bryce: [00:00:21] So Ren, this episode is a basics 101 about tax time bonanza. We'll cover things such as the basics on tax returns. What you need to do to fill out a tax return. Capital gains discounts, things like tax loss selling, franking credits, margin lines, all those sorts of things that you need to look out for or need to consider Ren, when that comes around. So do you want to kick it off Ren? 

Alec: [00:00:45] Very, very simply before we get into the basics, here's why it's so good to be an Australian and here's some of the ways that Australia. On, you know, in terms of being an investor. So we've talked about franking credits or dividend imputation before and we're not going to explain it again here. But Australia is one of the three countries with full dividend imputation. Now all these numbers are courtesy of Wikipedia, so if I'm wrong, just take it up with them. So yeah, one of three countries with full dividend imputation, one is also one of three countries that allow unrestricted use of negative gearing against any source of income. So that's, you know, baby boomers negatively gearing their houses to offset their work income. Most countries don't allow that capital gains discount. So if you hold an asset for a year or longer, your tax bill is halved on those assets. And then also, you know, we have a massive culture of dividends over here. The ASX 200 pays an average of 4.7% or 6.5% with franking credits in America, the S&P 500 is 2.2%. So there's a lot of not only getting paid more in dividends and stuff like that, but there's a lot of benefits through the tax system, which we'll talk about some of them today. But if you don't understand them, you can't take advantage of them. So that's probably the most important thing to understand. No know how much money you can get back from the government. 

Bryce: [00:02:08] Yeah, absolutely. Rene Rivkin, he said the key to being wealthy is to pay as less tax as possible. So yeah. 

Alec: [00:02:14] Kerry Packer said, why would I? Why would I try and not minimise my tax? So you guys aren't spending it well enough? Yeah, it's kind of true. 

Bryce: [00:02:22] So that's some of the reasons why it's good to be an Australian investor from a tax point of view. So let's talk about the basics Ren, and the basics in our eyes all comes down to understanding what sort of income you're making from your investments, what counts towards your tax, what counts towards your income, because it can be quite confusing, especially if it's your first year when you're making some capital gains and you're selling some stocks or getting some dividends, it's often hard to know where that all falls. So obviously you have your income from your major form of employment, be it full time work, part time work, whatever. But then on top of that, there are a number of other income streams that count towards your overall tax return, such as money from dividends, which is where a company will pay out part of their profits to you based on how many shares you hold. So if you don't get that dividend reinvested into stocks and you get that paid in cash, then that does contribute towards your tax taxable income. At the end of the day, then any price gains that you have on stocks that you purchased, if they go up in price, obviously, and you sell them, then that's called a capital gains tax. That proportion of profit also goes towards income for that year. So that's added on top of your income from your main form of employment. So I mean, at the end of the day, they all make up your assessable income and are taxed at the same rate depending on what tax bracket it all pushes you in. 

Alec: [00:03:40] The important thing to understand is that if your shares go up in price, that's a capital gain. You don't pay. It's not there's no capital gains event, so you don't pay tax on that capital gain until you actually sell. Yeah. The dividends are obviously when you get paid them the taxed in that year and their income. But you know if you are Warren Buffett and you bought Coca-Cola shares in 1950 and you haven't sold them in 2018, you haven't actually paid tax on any of those capital gains in that time. 

Bryce: [00:04:09] Yes. So I also want to add to that Ren. It's made me think that when you sell the stocks and this might seem obvious to some, but when you sell the stocks for a profit, you're not charged the tax there and then you're going to get that full profit straight into your bank account or into your investing investment holding account or whatever it may be. It's not until you claim those profits at the end of the year that the government then says you need to pay us tax on those profits. So do be aware that if you are getting significant profits throughout the year that you will need to have some lump of money at the end to probably cover the tax that the government says you owe them. So you're not going to be charged there. And then let's. 

Alec: [00:04:49] Talk about what you need to fill out your tax return. Let's try and make it a little less daunting. Sure. So the things that we talked about, your dividend income is is income, and that needs to be included. And where you've sold shares for a capital gains that's then recorded as capital gains, you need to include that. Now, something else that's really important that a lot of people don't think to do at the time, but regret it when they don't do it later is if you sell shares for a loss that's considered a capital loss and it's really important you record that every. Any shows that you sold that year, Because what the government lets you do is if you later make a gain and you've made a loss previously, you can actually not pay tax on those gains to make up for the earlier loss. So that's just another way that filling out your tax return properly will benefit you in the future.

Bryce: [00:05:39] Yeah, so your losses can be a tax advantage pending how much capital gains you've made. So yeah, the key there Ren, as you said, is to absolutely record them and include them in your tax return each year, even if you've made no capital gains because they're not going to count for anything if the government doesn't know about them and they're not going to believe you. If you said, Oh, I made a $1,000 loss three years ago, too bad. If you haven't recorded it, then. 

Alec: [00:06:01] Yeah, yeah. No going back. Just if you don't record in that year, it's gone forever. That's just a loss that you don't get any benefit from it on later down the line. Yeah. Now don't go out and make bad investments so you can get that lost. It's not worth it that you'd. 

Bryce: [00:06:17] Rather be paying capital gains tax than trying to offset it with a loss. 

Alec: [00:06:19] Yeah, yeah, yeah. Paying tax is when you're talking about investing if you know it's a pretty good thing. It means you made a correct decision. So don't be too sad. If you have to pay a lot of tax, it probably means you made a lot of profit as well. We hope you enjoyed this bite size. If you're thinking about how you can track your shares, come tax times. Well, Bryce wants to tell you about the programme that he uses anyway. Still talking.

Bryce: [00:06:40] About. That's it. Well, we often get asked, how can I track my portfolio? 

Alec: [00:06:44] It is annoying to calculate Dividends and Capital gains. It's something that so many investors miss is capital losses. Yeah. If you don't claim your capital losses, you can't offset them against gains in future years.

Bryce: [00:06:57] It's also tricky to do to track just general performance. If you have multiple brokers, a cash account is like having it all in one spot and I use a share site to do it all for me. I was hard on the Excel spreadsheets, but I've moved across to share so they have the ability to track the price performance and dividends, which is super important. From over 240,000 global stocks, crypto ETFs and funds. So again, I can see it all in one spot. If the dividends are automatic and I click and say I've sold it at this price, it tells me what my capital losses, capital gains are super helpful for tax reporting at tax time.

Alec: [00:07:32] Now, if you're intrigued by what Bryce is talking about and you want to sign up, go to sharesight.com/au/equitymates/. If you have less than ten holdings, it's absolutely free. So you can sign up, test the platform, see how it works. If you have more than ten holdings, you can sign up to a premium plan at share site dot com equity mates and they will give you the first four months free. That's pretty good. 

Bryce: [00:07:56] It is good. So check it out. It's free to kick off with. sharesight.com/au/equitymates