Investing in shares can be an effective way to build long-term wealth, but it also brings tax obligations that every investor should understand.
Whether you own a handful of shares or a diversified investment portfolio, keeping accurate records and working closely with your accountant can make tax time much simpler while helping you meet your obligations.
Shares and Tax – The Basics
When you buy shares, there is generally no immediate tax to pay. However, there are two main areas where tax commonly applies:
- Dividend income received from companies.
- Capital gains or capital losses when you sell your shares.
Understanding how these two areas work is important because they are treated differently for taxation purposes.
Dividends Paid to Your Bank Account
Many Australian companies distribute a portion of their profits to shareholders as dividends. If you choose to receive these dividends as cash, they are typically paid directly into your nominated bank account.
These dividend payments generally form part of your taxable income. Many Australian companies also pay franked dividends, which include franking credits representing tax already paid by the company. Depending on your personal circumstances, these credits may reduce your overall tax payable or even result in a tax refund.
Your accountant will include your dividend income and any associated franking credits in your annual tax return.
Dividend Reinvestment Plans (DRPs)
Some companies offer a Dividend Reinvestment Plan (DRP). Instead of receiving cash into your bank account, your dividend is automatically used to purchase additional shares in the company.
At first glance, this may seem like the dividend disappears because no money reaches your bank account. However, from a taxation perspective, the dividend is generally still treated as income in the year it is declared and paid.
The difference is simply that your dividend has been used to buy more shares rather than being deposited into your account.
This creates another important record-keeping requirement. Each parcel of shares acquired through a DRP has its own purchase date and acquisition cost, which may affect the calculation of capital gains tax when those shares are eventually sold.
Over many years, a DRP can result in dozens of separate share purchases that need to be tracked accurately.
Capital Gains Tax
When you eventually sell shares, you may make either a capital gain or a capital loss.
The taxable gain is generally calculated by comparing:
- The purchase price.
- Brokerage and eligible acquisition costs.
- The sale proceeds.
- Brokerage on the sale.
If you’ve held the shares for more than 12 months, you may be eligible for the Capital Gains Tax (CGT) discount, depending on your circumstances and the type of ownership.
Because investors often buy shares over many years at different prices, calculating the correct capital gain can become surprisingly complex.
Keep Your Accountant Informed
One of the most valuable habits any investor can develop is keeping their accountant informed throughout the year rather than waiting until tax time.
Your accountant should know about:
- New share purchases.
- Share sales.
- Participation in Dividend Reinvestment Plans.
- Dividend statements.
- Corporate actions such as share splits or company takeovers.
- Shares transferred between family members or inherited through estates.
Providing this information early helps maintain accurate records and reduces the likelihood of missing important tax events.
Many investors also maintain a simple spreadsheet recording:
- Company name.
- Purchase date.
- Number of shares.
- Purchase price.
- Brokerage paid.
- Dividend payments received.
- DRP allocations.
This information can be extremely valuable years later when shares are eventually sold.
Good Records Save Time
Most share registries and online brokers provide annual tax summaries and transaction histories. Keeping these documents together with your contract notes and dividend statements makes tax preparation significantly easier.
The Australian Taxation Office also receives information from many financial institutions, but investors should never assume every transaction has been reported correctly. Maintaining your own records remains important.
The Value of Professional Advice
Taxation of investments is rarely one-size-fits-all. Your overall tax position may be influenced by your income, investment structure, superannuation, trusts, companies, capital losses from previous years and many other factors.
An experienced accountant can help explain how these rules apply to your personal circumstances, identify opportunities that may be available, and help you remain compliant with Australian tax legislation.
Investing in shares should be about building wealth over the long term—not creating unnecessary stress at tax time. By keeping accurate records, understanding how dividends and capital gains are treated, and communicating regularly with your accountant, you can make informed decisions and have confidence that your investment records are in good order.
This article provides general information only and should not be considered taxation or financial advice. Tax laws are complex and individual circumstances differ. Speak with your accountant or appropriately qualified financial adviser before making decisions regarding your investment portfolio.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
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Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Please consider whether the information is appropriate to your circumstance before acting on it and, where appropriate, seek professional advice.