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As one of two certainties in life, investors need to be aware of stock market taxes.
Investors may be liable to pay them regardless of how much they have invested. But there are ways to minimise the liability – within the means of the law, of course.
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Capital gains tax is the most important of all stock market taxes
Arguably the most important one that stock market investors need to be aware of is capital gains tax or CGT. CGT is levied on any profits earned from the sale of investments such as stocks, bonds, and mutual funds.
Under Australian law, rather than paying CGT on each and every transaction, you calculate a ‘net capital gain’ and then include that in your assessable income. So the amount of CGT you pay depends on your total assessable income.
You can use any losses to minimise your net capital gain by including them in your tax return – they will reduce (or perhaps even cancel out) your liability from your trading.
This is a common reason why many dud stocks fall further in June, because investors want to claim the loss in their tax return and reduce any capital gains they may have made.
Unfortunately, if you have not made and gains and only losses, you cannot claim the loss back as a deduction.
Income tax is important too
Another key type of taxation that stock market investors need to understand is the income tax on dividends, especially if they invest in large cap stocks. When an investor owns shares in a company, they may receive payments known as dividends from those shares. It will be a fixed amount per share, typically a percentage of the company’s net profit after tax.
The dividend income received must then be reported on a taxpayer’s tax return and is subject to taxation at either ordinary or qualified rates, depending on the type of dividend payment received.
What about franking credits
But wait, isn’t tax being paid twice on the same money – first on the company’s profit, then on your income? This is where franking credits come into the picture.
In Australia, franking credits allow investors to receive a tax credit for the dividends they have received. This is a benefit offered by certain companies in the country that have paid taxes on their profits, making their dividends eligible for franking credits.
Essentially, franking credits enable companies to pass on the tax saved through the payment of dividends directly to shareholders. For example, if a company pays 30% corporate taxation on its profits before distributing dividends, then shareholders who receive these dividends will also be eligible for a 30% credit.
These credits are known as ‘imputation credits’ and can be used to offset any other taxable incomes an investor may have in order to reduce their total tax bill. Alternatively, if no other taxable income is earned in that financial year, then investors may be able to request a refund from the Australian Tax Office (ATO) for any unused franking credits.
It is important to note that it’s only those listed companies with taxed profits that are able to offer franking credits – private companies or trusts don’t qualify for this type of taxation benefit.
Overall, franking credits provide Australian investors with an excellent opportunity to save money on their taxes since they can offset some of the costs from dividend income against other taxable incomes they may have or even get refunds from unused credit amounts from ATO.
Be aware of stock market taxes
We are not a tax service so we cannot provide individual advice. But we hope we have outlined the two key taxes that you need to be aware of as an investor.
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