You have to declare your income from investments no matter if you get paid directly, or through a distribution. The list of investment income specified by the ATO are the following:
- Interest you earned
- Dividend Income
- Rental Income
- Income or credits you received from any Trust Investments
- Capital Gains
What is investment income?
Investment income is defined as the money you make from investments. It can include the interest and dividends from bonds, stocks, and other investment products, or gains from selling those investments.
The amount of income you earn is based on how much you have invested and how long you have invested it. Just think about when you invest $100 in a savings account earning 2% interest per year, at the end of the first year you would earn $2 in investment income.
Interest You Earned
As an Australian resident, you must declare any interest generated by your bank accounts as income on your tax return. This includes:
- Interest earned from financial institution accounts and term deposits
- Interest earned from any other source, including penalty interest received as a result of an investment
- Interest you earn from a children’s savings account that is opened or operated by you and the money in the account is yours
- Interest paid or credited to you by the ATO: for example, interest on early payments, interest on overpayments and delayed refunds
- Life insurance bonuses (you may be eligible for a tax offset equal to 30% of the bonus amount included in your income)
- Interest earned from foreign sources (you may claim a foreign income tax offset for any taxes paid on this income)
What Are Dividend Income?
A dividend is a share of the profits paid to a shareholder. You may be sent a dividend statement if you’re a shareholder and your company has made a dividend payment. The amount you receive represents the share of the profits that belongs to you in your capacity as a shareholder.
For tax purposes, a dividend can be paid to you as money or other property, including shares. If you receive bonus shares instead of money, the company issuing the shares should give you a statement that shows if the bonus shares are a dividend.
Dividend income can be generated by listed investment companies, public trading trusts, corporate unit trusts, and corporate limited partnerships. Some dividends are eligible for an imputation or franking credit, which means that their dividend payments have been partly or fully refunded by the Australian Tax Office (ATO).
Rental Income – What declarations are required
If you receive rent or rent-like payments in any form, it is vital that you declare this to the ATO. The reason for this is quite simple: if you do not declare the income, you will be underpaying your tax. It is standard practice to include these amounts on your tax return, as you would any other income.
A few examples of rent-like payments are:
- When you become entitled to keep a bond when the tenant defaults on the rent
- If a tenant damages your property and you receive compensation from an insurance company
- If a tenant reimburses or recoups a deductible expense, such as when they pay for repairs to damage they caused to your property
- Any money received from renting out a room or a house or unit through a website or app (the sharing economy)
Reporting Your Trust Investment Income On Your Tax Return
Most people don’t pay much attention to their investments. This is largely a result of the fact that many people don’t understand how their money is invested, or how it makes money for them. When someone invests in an investment trust, however, and it’s managed by a professional fund manager, that person can be more hands-off about their investments but still reap the rewards.
If you have an investment trust (or several) in your portfolio and have decided to let someone else take care of the details, it’s important to make sure that you are receiving all the income and credits to which you’re entitled. The reason for this is that many people do not claim all the benefits they could be getting from their investments.
When you first purchase an investment trust, or set up a new investment trust account, it’s important that you make sure your accountant sets up an appropriate tax-free structure for your investment in order to maximize its potential return while minimizing any tax liability you may face. You must show any income or credits you receive from any trust product in your tax return.
All income you receive from any trust investment/product must be declared in your tax return, even if it isn’t paid to you directly. In this case, the income or credits are credited to your account balance as part of the trust structure. You then have time to apply them to your tax return.
Your Capital Gains Income
If you sell an asset that has increased in value since you purchased it, or if a trust you are a beneficiary of distributes capital, you may make a capital gain. You must declare the amount of any capital gain you make when you sell a capital asset, such as an investment property.
Generally, your capital gain is the difference between:
- Your asset’s cost base (what you paid for it), and
- Your capital proceeds (the amount you receive for it)
According to the Australian Taxation Office, your cost base is generally what you paid for the asset. The cost base includes any money or other assets given as part of your initial purchase price. For example, if you buy shares and have to pay $1 for each share, and receive 500 shares in total for $500 cash, your cost base is $500. If you then sell those shares for $600 each, your capital gain is $100.
Capital gain is treated as part of your total income, it isn’t tax separately.
It is clear then to see why ensuring that we receive the correct amount of tax paid can be so important. Ensuring that you are reporting your correct income will take some time and effort but it will be worth the outlay in the long run.
By simply checking your bank statements and investment records, you should be able to work out what your total taxable investments are and then do a little planning on where they might be best held to save on the amount of income tax that you owe or alternatively how they might be best utilised to ensure that you have a safety net for any financial difficulties in the coming years.
For more details regarding Investment Income, please visit the ATO website at www.ato.gov.au. If you need assistance in preparing your tax return with investments, you can always contact us, Profit First Accounting via the following method:
03 5979 2671