According to the ATO, first-time shares and Exchange Traded Fund (ETF) investors often misunderstand their tax obligations when reporting capital gains from their investment activities.

Tim Loh, ATO's Assistant Commissioner, said that the tax office is 'keenly aware' that micro-investment platforms have helped a record number of new investors get their foot in the door.

"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," Mr Loh said.

Even though the ATO receives data on dividend payments and the buying and selling of shares from multiple sources, taxpayers are urged to check that all necessary information has been included before lodging their tax return.

What information needs to be included in a tax return?

ETF shareholders will be provided with a Standard Distribution Statement (SDS) that breaks down what needs to be included in their tax returns. 

The SDS will show capital gains or losses from sales of units that need to be included according to the ATO.

Additionally, the ATO says that anything received through a dividend or distribution reinvestment plan is treated the same as receiving cash, even if shares are received instead.

"Most people recognise that they must pay tax on any money earned from selling shares," Mr Loh said.

"But many don’t realise that tax also applies to dividends and distributions, even if they are automatically reinvested into a reinvestment plan," Mr Loh said.

Investors who sell shares need to calculate their capital gain or loss, and this needs to be reported on their tax return.

However, the ATO notes that investors cannot claim paper losses if the share price drops but they still own the share.

"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," Mr 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."

Record keeping 'the best way' to comply with tax obligations

Mr Loh describes taxes on shares and ETFs as complex and that poor record-keeping doesn't make it any easier.

"Keeping good records, including dates, prices, commissions, and details of taxable events such as share splits, share consolidations, mergers, and demergers is essential to avoiding trouble at tax time," he said.

Mr Loh said that using data from share trading platforms and the SDS is a 'vital way' to avoid making simple mistakes on tax returns.

"Errors related to CGT or income from dividends and distributions, whether deliberate or accidental, will lead to amendments. You may need to repay some or all of a tax refund and penalties may apply," he said.

What records do you need to keep?

According to the ATO, these are the records that need to be kept for tax time:

  • The date of purchase/reinvestment
  • The purchase amount/value
  • Details of any non-assessable payments to you
  • The date and amount of any calls (if shares were partly paid)
  • The 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 – you may be able to offset these losses
    against future capital gains
  • Dividend or managed investment distribution statements (Standard Distribution Statements)

CHESS statements go electronic

At the end of August, the ASX's 'Clearing House Electronic Subregister System', or CHESS, announced its statements will go electronic.

Previously, investors would be sent share holding statements and notifications via the mail. 

However, participation in electronic communications is a choice for sponsoring participants and investors.

CHESS-sponsored shares essentially mean that there is a paper trail of share ownership by an individual.

This is different to many micro investing platforms where investors put their money into a trust, which is then invested on the sharemarket on their behalf.

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