The tax considerations for investing in ETFs can be complicated. But if you want to stay on the right side of the ATO, you need to know them.
The boom in Exchange Traded Funds (ETFs) on the sharemarket has attracted thousands of first time investors. If you’re one of them, the Australian Tax Office (ATO) is warning you not to forget your tax obligations.
First-time investors often misunderstand their tax obligations in relation to reporting capital gains from the sale of shares and income in the form of dividends and distributions.
ETFs provide investors with a Standard Distribution Statement (SDS) that breaks down what they, or their registered tax agent, need to declare in their tax return. When an investor sells units, the SDS will show the capital gains or losses made from the sale of the units, which also need to be included in tax returns.
If you reinvested your distribution
As well, ETFs often provide unitholders with an option to reinvest their distribution. This means that instead of unitholders receiving a dividend, the ETF distributes shares instead. Tax wise, this means the cash is distributed and then reinvested in new units. So even though you didn’t receive any bankable cash, you bought new units instead. You still need to declare this as taxable income.
Note: anything received through a dividend or distribution reinvestment plan is considered income and for tax purposes is treated in the same way as receiving cash.
If you sell your shares
Investors who sell shares will also need to calculate their capital gain, or loss, and record it in their tax return.
It’s important to note that capital losses only happen on the sale of the share. Investors cannot claim ‘paper losses’ on investments if the share price drops, but they continue to own the share.
If you’ve realised a capital loss from the disposal of investments, such as shares, you should be aware that capital losses can only be offset against capital gains and not other types of income. Investors who don’t have a capital gain in the same income year to absorb the loss can declare the loss in their tax return and carry it forward to future years to offset against future capital gains.
Records you need to keep
Keeping good records is the best way to ensure you are complying with your tax obligations. The ATO requires you to keep tax records for at least five years from the date you lodge your tax return. Here’s a list of records you need to keep when it comes to ETFs:
- date of purchase/reinvestment
- purchase amount/value
- details of any non-assessable payments to you
- date and amount of any calls (if shares were partly paid)
- date of sale and sale price (if you sell them)
- any brokerage costs or commissions paid to brokers when you buy or sell
- details of events such as share splits, share consolidations, returns of capital, takeovers, mergers, demergers and bonus share issues
- details of capital losses made in previous years. As noted above, you may be able to offset these losses against future capital gains
- dividend or managed investment distribution statements (Standard Distribution Statements)