ATO warns investors about mistakes made on tax returns

It’s tax refund time and money is flowing, but the ATO is warning investors - especially first-timers - about mistakes to avoid.

We’re two months into tax time and it’s tempting Australians to file their return now to grab an average $2600 refund.

But anyone who’s an investor – including the growing army of first-time stockmarket investors who took their first punt during the pandemic – should consider sitting tight.

You don’t want the Australian Taxation Office to come knocking because you failed to declare income. Its sophisticated computer systems track share purchases and sales, dividends, cryptocurrency trades and other transactions – and several investment providers have not yet released their tax statements.

The ATO says there are a few mistakes that investors make when doing their tax, and one is jumping the gun on filing their return.

ATO assistant commissioner Tim Loh says a majority of share dividend and investment fund data has been sent to it and pre-filled on tax returns, but more will continue to flow during September and into October.

Almost six million share transactions will automatically be added to the tax returns of 612,000 people, but Mr Loh says it’s still important for investors to check all their investment income has been included.

The average tax refund so far this year has been about $2600.

“We know there was a lot of first-time investors in shares and ETFs,” he says of the 2020 and 2021.

Exchange traded funds (ETFs) are often slow to send out tax statements, largely because they spread people’s money across a wide range of different stocks and have to collate a lot of stuff.

Micro-investment platforms such as Raiz and CommSec Pocket have grown in popularity and while they may be set and forget investments, they’re not set and forget on the tax front.

Income received through these platforms still needs to be declared.

Investors should try to avoid these tax time mistakes:

DIVIDEND REINVESTMENT

Shares, ETFs and managed funds often allow people to reinvest dividends and distributions. Even though you don’t see the cash, it’s still taxable income in the year it’s paid.

“Most people recognise that they must pay tax on any money earned from selling shares,” Mr Loh says.

“But many don’t realise that tax also applies to dividends and distributions even if they are automatically invested into a reinvestment plan.”

CAPITAL GAINS AND LOSSES

When we sell an investment, the profit we make gets added to taxable income and can be taxed up to 47 per cent. If the asset was held more than a year, there’s a 50 per cent discount on this capital gains tax payable.

The ATO’s technology spots CGT transactions, so conveniently forgetting to declare them is pointless.

Sometimes an investment turns sour, and its capital loss when sold can be used to offset capital gains to lower a tax bill. But it can’t be offset against other types of income.

“Each year we see some enterprising entrepreneurs trying to offset their capital losses against income tax tied to other income, such as salary and wages,” Mr Loh says. Others incorrectly try to claim a paper loss – where the asset wasn’t sold but is worth less than what was paid for.

CRYPTOCURRENCIES

Bitcoin and other cryptocurrencies boomed in 2020-21, with five-fold increases in the value of bitcoin.

The ATO treats crypto as an investment asset and has data matching programs with cryptocurrency exchanges, so if you’ve sold for a big profit you’ll have to declare it.

And if any of this tax stuff threatens to explode your brain, seek help from a professional tax agent.

Originally published as ATO warns investors about mistakes made on tax returns