New to investing? The ATO wants a word

While tax season may be well underway, it seems as though not everyone is lodging their returns correctly, as the Australian Taxation Office (ATO) has released some advice for Australians new to share trading and investing.

Interest in investing has skyrocketed during the pandemic, with a recent report from research firm Investment Trends revealing that close to 150,000 Australians traded shares, ETFs and other securities for the first time between November 2020 and May 2021 alone.

According to ATO, new investors often misunderstand their tax obligations when it comes to capital gains though, leading to lodgement errors and ultimately to delays in getting their tax returns.

“Unfortunately, first-time investors often don’t understand their taxation obligations, don’t keep appropriate records and are more likely to make mistakes when lodging their tax returns,” said assistant commissioner, Tim Loh.

So what do newcomers to investing need to be aware of? The ATO has laid out three key areas.

Micro investing

In recent years micro investment platforms like Raiz and Spaceship have become popular among investors wanting to invest relatively small sums of money regularly over time, with both platforms offering various ‘portfolios’ (which are generally made up of different ETFs).

The ATO has reminded investors using these platforms that they may still need to declare these investments in their tax returns though, especially if they have sold anything which may have caused a capital gain or loss.

Reinvestment plans

A dividend reinvestment plan for shares or a distribution reinvestment plan for ETFs allows investors to automatically re-invest any cash dividend or distribution into new units in the investment. According to the ATO, investors need to be mindful that they still need to declare these distributions though - even if they aren't withdrawn.

“Most people recognise that they must pay tax on any money earned from selling shares. But many don’t realise that tax also applies to dividends and distributions, even if they are automatically reinvested into a reinvestment plan,” said Loh. 

Offsetting losses 

While most people are aware that they may be able to offset some of the losses made by investing, the ATO says there are misconceptions about how this works. For example, investors aren’t able to offset ‘paper losses’ - they need to be real losses made after shares are actually sold.

“Each year we see some enterprising entrepreneurs trying to offset their capital losses against income tax applied to other income, such as salary and wages. Others attempt to offset a ‘paper loss’ against actual income,” Loh said.

“Our sophisticated data analytics are able to spot this and we may apply penalties for investors that have intentionally done the wrong thing.”

While the latest advice is targeted at Australians who have invested in shares and ETFs, the ATO already laid down a warning to cryptocurrency investors earlier in the year. 

The ATO expressed ‘concerns’ over what it said was a belief held by many investors that gains made from cryptocurrency were not subject to tax - a belief that is untrue. As a result, the agency said that it would be writing to around 100,000 taxpayers with crypto assets in order to remind them of their tax obligations.   

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For more information relating to your tax obligations as an investor, check out the ATO’s run through on investment income. Or if you're looking to start your own investing journey, head on over to our dedicated share trading hub to compare share trading accounts or read through our handy guides.