As tax time approaches, it is vital to be aware of how your investments and any profit they generate affects your assessable income. Arming yourself with this knowledge as well as the understanding of what deductions you are entitled to is key to making the right decisions regarding your finances.

So, what exactly is investment income?

Investment income is any income made from one or all of the following sources:

  • Interest

Interest is passive income generated when a sum you afford to a financial institution or other qualified establishment is invested. Interest is usually a certain percentage of the original sum. It can also be part of a penalty settlement for delayed payments that you are owed.

  • Dividends

Dividends can be monetary income or issued as property or shares. Dividend income is usually paid from a public or corporate trust, a listed investment company, or a corporate partnership.

  • Rent

Any rent or rent-related payments generated from your investment properties is considered part of your taxable income. This includes, but is not limited to, bond money if it you become entitled to keep it, insurance compensation for lost rent, booking fees, and reimbursements for damage repairs.

If you jointly own the rental property with another person or have shares in a rental property business partnership, you only need to declare your shares of the rent in your tax return.

  • Managed investment trusts

Income derived from any product or trust you’ve invested in such as a mortgage trust, unit trust, cash management trust, or any other managed fund, such as an equity or growth trust.

  • Capital gains

A capital gain is the profit made from selling a capital asset for more than its original cost. Capital gain also applies if a managed fund or other trust distributes capital gain to you.

How does this affect your taxes?how investments are taxed

As the name suggests, investment income is considered part of your income for tax purposes. This means that profit generated from investments you have made is added to any active income you earn throughout the financial year. This is then taxed as per your income bracket.

However, depending on the type of investment income, you may be entitled to certain tax deductions. It is important to note that if the income is from an exempt source, then it is also nondeductible.

What deductions can you claim?

  • Interest, dividends, and trusts

Any expenses incurred from managing these investments is deductible. This includes payments made to an accountant managing your investment account or a financial agent advising you on these investments, interest charged on money you borrowed to make the investment, such as a loan taken out to buy shares – if the shares are income producing, and any other costs such as travel expenses, subscriptions, and other similar necessary expenditures.

Additionally, dividends apply for a full offset if they are franked. Generally, dividends are subject to a 26-30% company tax rate, depending on the size of the business. This tax should be declared as franked credit in your income returns. If the dividend is paid fully franked and your marginal tax rate is below the company franking rate, you might receive all or part of the franking credits as a refund – depending on your marginal rate. If, however, it is above, you might need to pay additional taxes on your dividend.

Any investments made into cryptocurrencies will also need to be reported for tax purposes. Refer to our blog post on how cryptocurrencies are taxed.

  • Rent

Expenses paid for the management of a rental property while it is rented out or genuinely available for rent are deductible. As per to the ATO, there are three main types of rental expenses:

  1. Expenses claimable in the same financial year – such as loan interest, council rates, and repair costs
  2. Expenses claimable over a series of years – such as depreciation
  3. Expenses not claimable – such as repairs paid for by the tenant and travel costs

Moreover, if your deductible expenses total more than the income generated from the property, the property is said to be “negatively geared”. This means that the property is generating a net loss, and you may be able to claim a deduction for the full expenses incurred.

  • Capital gains

The sale of an asset results in a capital gain – or loss. For this reason, careful planning should go into the time when the sale is made, especially since the tax is triggered once the contract is signed, and not when the payment is settled. Similarly, the duration of time the asset is held affects the tax due. For example, an asset sold after it has been held for 12 months is only taxed at 50% of the net gains.

It is incredibly important to keep up-to-date records of all your investments for at least five years after an asset is sold.

Additionally, small businesses, with an aggregated turnover less than $2 million, may be eligible for certain capital gains tax concessions if the capital asset is an active asset – one that is used in the course of the business. These concessions are:

    1. The 15-year exemption
    2. 50% active asset reduction
    3. Retirement exemption
  1. Rollover

Rules and requirements apply, contact us for more details.

Finally, certain investments are more tax effective than others, however, choosing an investment should depend solely on your financial goals and what risks you’re comfortable taking. How your investments are taxed should only be a secondary concern. For more advice on taxes and how your investments are affected, contact us and talk to one of our experienced agents.

Disclaimer: Information included in this post is of general nature, it has been prepared without taking into account your specific situation. It is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice. You should not make any decision, financial or otherwise, based on any of the information presented here without undertaking independent due diligence and consultation with a professional accountant or financial adviser.