Tax implications on shares: 12 Things you should know
The tax implications of shares are not limited to just normal trading or investing activities. Learn about dealing with shares at tax time in detail here.
Investing in shares will impact your capital gains tax
Capital Gains Tax (CGT) is part of income tax and is one of the most common types of taxes that individuals are subject to. Where income tax is tax paid on any taxable income such as your salary and/or dividends from shares, CGT is a tax imposed on the profits or capital gains obtained from the sale or disposal of certain assets, such as shares, property, or investments. When it comes to share investing, CGT is relevant when you sell or dispose of shares.
We will dig into how capital gains tax works in Australia, specifically around the tax implications you may face from the Australian Taxation Office (ATO) on different types of activities relating to share ownership.
Furthermore, it is important to note that tax implications may be different depending on your residency for tax purposes and your individual circumstances. This article focuses more on taxation for Australian tax residents and aims to serve as a guide to better understanding Australian taxation laws.
ℹ️ Related: Where can I download my Stake tax statement?→
List of tax implications on your shares
- Buying shares
- Selling shares
- Inheriting shares
- Receiving shares as a gift or gifting shares
- Capitals gains on overseas shares
- Franking credits
- Employee share schemes
- Mergers, takeovers and demergers
- Share buy-backs
- Company liquidation
- ETFs and managed funds
1. Buying shares
Taking the first step to own shares does not trigger any tax implications in itself, but it is important to recognise that buying shares sets the stage for potential future tax liabilities.
Firstly, it's important to identify whether the ATO would classify you as a share trader or a share investor, as the taxation is different for each. As a share trader, gains from your trading activity would be added to your assessable income and taxed at your marginal tax rate. Losses, on the other hand, would be deductible from your income.
If you are considered a share investor, gains and losses would be taxed under CGT rules. Buying shares as an investor would generally lead to your share purchase price, plus any other eligible costs, being the cost base for CGT calculations.
Buying shares may also lead to you receiving income in the form of dividends or distributions. Both types of income are required to be lodged on your annual tax return. The only difference between dividends and distributions is the time they are added to your tax return; dividends are taxed when received or credited while distributions are taxed the moment you are entitled to it (even if you have not received it yet).
We cover this in more detail in our article ‘What capital gains tax on shares will I pay?’.
2. Selling shares
Similar to the above section, understanding whether you are considered to be a share trader or share investor is the first step in determining how you would be taxed by the ATO.
Selling shares as a trader, your earnings would be taxed as part of ordinary income. Selling shares as an investor on the other hand triggers a CGT event, which means that you may have to include net gains or losses from the sale in your tax return. Capital gains or losses are calculated as the proceeds from the sale subtracted by their cost base.
The CGT calculations when you sell shares may be different if they were received under circumstances other than directly buying them on the market; such as when you sell shares that were inherited, were part of employee share schemes, were previously part of merger and takeover activities, etc. We go through each of these in the sections below.
3. Inheriting shares
Generally, CGT does not apply when you first receive shares through an inheritance. However, you may be liable to pay CGT when inherited shares are disposed of or pay income tax when you receive dividends from them.
When you inherit shares, the cost base for CGT purposes may be either the value of the asset when the original owner acquired it or when they died, depending on the circumstances. If the asset was acquired before CGT was implemented (20 September 1985), then the cost base would be the market value of the asset on the day the original owner passed away. Assets acquired after 20 September 1985 would generally carry on their existing cost base when inherited. If the deceased had any unapplied capital losses when they passed, these do not transfer.
When it comes to dividends, if the shares you inherit pay dividends, you will be entitled to receive the dividend payments. Dividends are generally treated as part of assessable income and are subject to income tax. As a result, you will need to include the dividend income in your annual tax return and pay tax on it at your applicable tax rate.
Another thing to note about inherited shares is the application of the CGT discount if you choose to sell them for a profit. If you hold the shares for at least 12 months from the date of inheritance, you may be eligible for the CGT discount. This discount means that only 50% of the capital gains will be included in your taxable income if you sell the shares, reducing the amount of tax payable on the gain. Additionally, the ATO may allow you to have that cost base indexed for inflation, which may lower your CGT tax implications. The ATO provides more details about how CGT is applied to inherited assets.
4. Receiving shares as a gift or gifting shares
Receiving or gifting shares requires you to keep track of some information for the purposes of CGT.
Receiving shares as a gift
When you receive shares as a gift, there are generally no immediate tax consequences. The gift of shares is not considered taxable income, so you won't owe income tax on the value of the shares at the time of the gift.
However, if you later sell the gifted shares, you may be subject to CGT on any capital gains made since the date of the gift. The CGT is calculated based on the market value of the shares at the time of the gift, not the original purchase price by the person giving the gift. If you hold the shares for at least 12 months from the date of the gift, you may be eligible for the CGT discount.
If you gift shares to someone else, there may also be tax implications. Gifting shares is considered by the ATO as a disposal for CGT purposes, and the value used to calculate your capital gain or loss is the market value of the shares on the day of the gift. The net capital gains/loss amount must then be included in your tax return for the year you gave away the shares.
5. Capital gains on overseas shares
Your tax liability on capital gains from overseas shares heavily depends on your residency status for tax purposes. Australian residents are typically subject to tax on worldwide income, including capital gains from both domestic and overseas shares.
If you have already paid tax overseas for shares that weren’t purchased in Australia and you are an Australian resident for tax purposes, you may be able to claim this as a tax offset against your Australian tax liability. Australia has double taxation agreements with many countries to avoid the same income being paid for twice. These agreements may provide relief or credits for taxes paid on capital gains in the foreign country.
It's also important to consider foreign exchange rates when calculating capital gains on overseas shares. Fluctuations in currency exchange rates can impact the calculation of your capital gains or losses. To assist with this, the ATO has an online calculator for the conversion of foreign capital gains into Australian dollars and the RBA also publishes daily exchange rates.
To ensure compliance with Australian tax regulations, it's advisable to keep detailed records of your overseas share transactions, including purchase and sale dates, prices, and any related expenses. These records will be required for accurately reporting your capital gains or losses in your tax return.
When you own shares, there are tax implications when you receive dividends, participate in a dividend reinvestment plan, and when you participate in a bonus share scheme.
Receiving dividends from investments has tax implications. Dividends are generally considered assessable income and must be included in the investor's tax return when they are credited. The dividends are taxed at the individual's marginal tax rate, which means they are subject to income tax. However, they may be eligible for franking credit tax offsets (another section in this article) associated with dividends, depending on their circumstances. These can help reduce the overall tax liability on dividend income.
Dividend Reinvestment Plan (DRP)
A Dividend Reinvestment Plan (DRP) allows investors to reinvest their dividends back into additional shares or units of the company or fund, instead of receiving the dividends in cash.
From a tax perspective, participating in a DRP does not provide any immediate tax benefits or deductions. The investor is still required to include the dividends as assessable income in their tax return, even though they have not received the cash equivalent. The cost base of the additional shares acquired through the DRP is the amount of the dividends used to acquire them, which will impact any future capital gains or losses when those shares are sold.
Bonus share schemes
Bonus share schemes involve the issuance of additional shares to existing shareholders, usually as a reward or incentive. From a tax standpoint, the tax implications of bonus shares depend on whether the scheme is classified as a dividend or a capital gains tax (CGT) event. If the bonus shares are considered a dividend, they are treated as assessable income and subject to income tax at the investor's marginal tax rate. The value of the bonus shares is included in the investor's assessable income in the financial year they are received or credited.
On the other hand, if the bonus shares are classified as a CGT event, the investor will not immediately incur a tax liability. However, the cost base of the original shares is adjusted to reflect the additional shares received. This adjustment will impact any future capital gains or losses when the shares are eventually sold. The ATO has released a flowchart to assist in calculating the tax implications of bonus share schemes.
7. Franking credits
Franking credits are a unique feature of the Australian taxation system. They are designed to prevent double taxation of company profits distributed as dividends to shareholders. When a company earns profits, it is required to pay corporate tax on those profits at the applicable tax rate, which is currently 30% for most companies. When a company distributes dividends to its shareholders, it may attach franking credits to those dividends. The franking credits represent the tax already paid by the company on the profits from which the dividends are derived.
As such, shareholders who receive dividends with attached franking credits can use these credits to offset their personal income tax liability. The franking credits reduce the amount of tax the shareholder needs to pay on the dividend income.
There are three scenarios regarding the distribution of dividends and franking credits.
Fully franked dividends
If the dividend is fully franked, it means that the company has already paid tax at the full corporate tax rate of 30% on the profits from which the dividend is paid. In this case, shareholders are entitled to claim a tax offset for the full amount of the franking credits attached to the dividend, subject to certain rules.
Partially franked dividends
If the dividend is partially franked, it means that the company has paid tax at a rate lower than the full corporate tax rate on the profits from which the dividend is paid. In this scenario, shareholders can claim a tax offset for the portion of the franking credits that corresponds to the tax rate already paid by the company.
If the dividend is unfranked, it means that no franking credits are attached to the dividend. In this case, shareholders cannot claim any tax offset related to franking credits. The dividend is considered income and taxed at the shareholder's marginal tax rate.
If the total amount of franking credits exceeds the shareholder's tax liability, the excess franking credits can potentially be refunded to the shareholder by the ATO as a cash refund.
8. Employee share schemes
Employee share schemes (ESS) in Australia have specific taxation rules that govern the treatment of shares or options received by employees as part of their employment. The tax treatment depends on the type of employee share scheme and when the shares or options are acquired.
There are generally two types of schemes: "taxed-upfront" and "deferred taxation" schemes. Additionally, there are certain concessions available for eligible employee share schemes that can reduce the taxable amount or provide other tax benefits. One of them is a start-up concession that may be available provided you and your company meet the eligibility requirements.
Taxed-upfront employee share scheme
In taxed-upfront schemes, you would be liable for income tax on the discount (market value of the ESS interests when they are acquired less any consideration paid) you receive from the ESS at the time you acquire the shares. This value is typically included in your assessable income in the financial year in which the shares or options are acquired. The ATO also offers a $1,000 reduction from the amount you must include in your tax return, provided you meet certain conditions.
Tax-deferred employee share scheme
In deferred taxation schemes, the tax liability is postponed until a later event, such as when the shares or options are sold or vested. At that point, the employee may be subject to income tax on the difference between the market value at the time of acquisition and the market value at the time of the taxing point. To be able to defer tax on your ESS, both you as an employee and the ESS itself have to meet certain conditions.
Employers are generally required to report employee share scheme details to the Australian Taxation Office (ATO) through an annual report, which includes information about the shares or options provided to employees.
9. Mergers, takeovers and demergers
If a company you are invested in engages in M&A (mergers and acquisition) activities, this may trigger a CGT event for you even if you did not actively engage in any investor activity.
Mergers and takeovers
When a company engages in a merger or takeover, shareholders of either company (usually the one being taken over) may have a CGT obligation if they are required to dispose of their existing shares or if they were to be cancelled.
In these events, shareholders would generally receive remuneration for their shares in the form of cash or shares of the company doing the takeover. When exchanging shares, it is necessary to report your capital gains in your tax return. This involves calculating the market value of the new shares (at the time you disposed of your previous shares) and subtracting it from the cost base of the disposed shares.
If shareholders receive cash instead of shares as consideration for the merger or takeover, the capital gain is calculated by taking the difference between the cash received and the cost base of the original shares.
Since every takeover or merger arrangement is unique in its own way, it is essential to obtain comprehensive information regarding the specific circumstances of each arrangement from the involved parties.
Note: In certain circumstances, the ATO offers scrip for scrip rollover to shareholders involved in mergers and takeovers. The rollover allows shareholders to defer the capital gains tax liability that would normally arise from the transaction. This relief may apply when shareholders receive share considerations.
A demerger happens when one company decides to split into two or more entities. When this happens, shareholders of the group generally acquire a direct interest in the demerged entity, and they can choose whether or not to rollover or defer any capital gains or losses.
If you choose to do a rollover, you disregard any capital gains or losses made under the demerger, and your new interests in the demerged entity are acquired on the day of the demerger. If you can't or choose not to rollover, all your new interests in the demerged entity are still acquired on the day of the demerger, but you can't disregard any capital gains or losses.
The company demerging would usually advise its shareholders on whether the CGT rollover relief is available for them.
10. Share buy-backs
Companies may sometimes choose to buy back their shares from investors at a certain price. Deciding to participate in a share buy-back program would trigger a CGT event whether a company buys back through the markets or by sending you a direct offer.
A company may buy back their shares through the market, called an "on-market buy-back". In this case, you would calculate your capital gain or loss just like how you do when selling shares to any other buyer; by subtracting the cost of the shares from your capital proceeds.
In the case of an off-market buy-back, where a company essentially offers to buy back shares from you directly, your capital proceeds calculations will require an extra step of comparing the buy-back price that the company offers and the market value of the shares on the day that the buy-back is executed.
The ATO notes that your capital proceeds cannot be less than the market value your shares would have had if the buy-back had not been proposed.
If the buy-back price is equal to or greater than the shares' market value, your capital proceeds will be the amount paid to you, excluding any dividend paid as part of the buy-back.
However, if the buy-back price is less than the market value your shares would have had if the buy-back had not been proposed, your capital proceeds will consist of two components.
The first component is the market value your shares would have had if the buy-back had not been proposed.
The second component is any dividend paid to you as part of the buy-back, which should be subtracted from the first component.
There are a few rules around the taxation on share buy-backs, but to illustrate better, the ATO has provided an example.
11. Company liquidation
In the unfortunate case where a company you are invested in liquidates, it may be possible for you to record a capital loss on shares that have become worthless if the company's liquidator or administrator provides written confirmation that there is no possibility of you receiving any further distribution from the company's dissolution. Additionally, you must be holding the share as an investor and not as a share trader.
12. ETFs and managed funds
Exchange-traded funds (ETFs) and managed funds may have different implications for capital gains tax than shares do.
Tax implications for exchange-traded funds (ETFs)
ETFs are investment funds that are traded on stock exchanges, and they are designed to track the performance of a specific index or asset class. From a CGT perspective, ETFs are treated similarly to shares. When an investor sells ETF units, any capital gain or loss realised will be subject to CGT. Like CGT for shares, capital gains from the sale of ETFs may also be eligible for the 50% CGT discount.
In addition to selling ETF units, ETF investors may also be subject to CGT if the ETF issuer conducts internal portfolio rebalancing or makes capital gains distributions.
In such cases, investors may need to include the distributed capital gains in their assessable income. This happens more often with actively-managed ETFs compared to passively-managed ETFs that invest in an index.
For ETFs that pay distributions, this amount will have to be included in your tax return as income; in a similar way that dividends from shares are. The difference between distributions and dividends lies in the time they are taxed: dividends are taxed when the dividend is paid to you, while distributions are taxed the moment they are declared.
Fortunately, ETFs usually issue either an AMIT Member Annual Statement (AMMA) or a Standard Distribution Statements (SDS), both of which provide a detailed breakdown of information that should be declared in their tax returns. This statement outlines the capital gains or losses arising from the sale of units alongside any distributions paid or credited to the investor within the financial year.
Tax implications for managed funds
Managed funds, also known as mutual funds, pool money from multiple investors and are managed by professional fund managers. The CGT implications for managed funds differ depending on whether the fund is a unit trust or a company structure.
For unit trust managed funds, the tax treatment is similar to that of ETFs. Capital gains or capital losses realised on the sale of units are subject to CGT, and may also be eligible for 50% CGT discount. Furthermore, capital gains distributions made by the managed fund may need to be included in the investor's investment income.
For managed funds structured as companies, the CGT implications are different. As the fund is a separate legal entity, any capital gains or losses realised within the fund are not directly attributed to individual investors. Instead, investors receive dividends or distributions from the fund, which may include a component of the fund's capital gains.
The taxation for managed funds can get much more complicated than the above, and those who invest in these securities may find it extremely beneficial to keep good records of any activity within their investments and seek professional advice.
Tax implications on shares FAQs
What is a capital loss carry forward?
In the ATO's Capital Gains Tax (CGT) rules, a tax loss carry forward refers to the ability to offset capital losses against capital gains in order to reduce the overall CGT liability. When you sell or dispose of an asset and incur a net capital loss, you can carry that loss forward and use it against future capital gains, thereby reducing the amount of CGT payable.
Do I need a tax agent to help with my annual tax return?
While it is not mandatory in Australia to hire a tax accountant to help with your annual tax statement, many individuals choose to receive professional advice for several reasons.
- Knowledge and expertise: Tax accountants/agents are legally required to obtain the necessary qualifications before being able to become registered to provide taxation services. Due to this, they are highly knowledgeable about the different types of taxes as well as tax implications on the income you make, whether from employment, businesses or capital gains.
- Complexity of your taxes: If you only have a few sources of income and have the standard deductions, you may be able to handle your tax return independently using tax software or online tools. However, having multiple income streams such as investments, self-employment income, and investment properties, adds multitudes of complexity to your tax return. Tax accountants can help navigate intricate tax regulations and optimise your tax return.
- Time and effort: Preparing your own tax return can be time-consuming. Hiring a tax accountant can save you time and effort, as they will take care of gathering necessary documents, organising your financial information, and preparing accurate tax returns on your behalf.
- Tax planning and optimisation: Beyond preparing your annual tax return, tax accountants can also provide valuable tax planning advice. They can help you identify opportunities for tax optimisation, recommend strategies to minimise your tax liability, and may even assist with long-term tax planning, such as retirement or estate planning.
- Deduction for the employment of a tax accountant: The ATO supports the hiring of a registered tax agent during tax time by actually allowing their fees to be deductible on your income tax return. While it does not make their services free of charge, it provides a financial incentive for individuals to seek professional assistance and ensures that the cost of hiring a tax accountant can be offset against their taxable income, potentially reducing their overall tax liability.
Are brokerage fees tax deductible?
Brokerage fees incurred for buying or selling investments are generally not directly tax-deductible for share investors. These fees are considered incidental costs and are typically factored into the cost base or acquisition cost of the investment. When calculating capital gains tax (CGT), the brokerage fees paid can be included in the cost base of the asset, reducing the capital gain or increasing the capital loss.
For share traders on the other hand, they may be tax deductible.
Do you have to pay tax on shares you haven't sold?
Known as "paper gains/losses", you generally do not have to pay tax on shares that you haven't sold. Capital gains tax (CGT) is triggered when you sell or dispose of shares and realise a net capital gain.
As long as you continue to hold the shares without selling them, you will not have incurred any taxable capital gain. It's important to note that any investment income received from the shares may still be subject to tax in the year you receive them. However, specific situations, such as professional trading or certain types of share holdings, may have different tax implications.
The contents of this article are intended to be of a general informative nature only. Any material relied upon in connection with the preparation of this article is believed to be accurate and current as at the time of publication. This article has been prepared without considering your personal circumstances and does not take into account your specific tax needs or objectives. Please consider seeking independent tax advice prior to making any investment decisions.
Stella is a markets analyst and writer with almost a decade of investing experience. With a Masters in Accounting from the University of Sydney, she specialises in financial statement analysis and financial modelling. Previously, she worked as an equity analyst at Australian finance start-up, Simply Wall St, where she took charge of the market insights newsletter sent out to over a million subscribers. At Stake, Stella has been key to producing the weekly Wrap articles and social media content.