Tips for Tax-Effective Investments: Australian Tax Considerations
In Australia, if you derive income from investment activities, such as interest, dividends and rent, the amount you receive is ordinarily liable to tax when it is paid or credited to your account. Under the PAYG instalment system you may need to prepare an Instalment Activity Statement and pay tax on an ongoing basis (usually quarterly). The Tax Office will notify you if you need to do this.
You can deduct from your assessable income any loss or outgoing to the extent that it’s incurred in gaining or producing assessable income, such as interest on borrowings to buy investment assets (for instance, shares and real estate) that pay income.
If you derive dividends you may qualify for dividend franking credits. When you lodge your tax return you must include both the dividend and franking credit as part of your assessable income; and you can offset the franking credit from the tax payable. If your franking credits exceed the tax payable, the Tax Office refunds the difference back to you.
If you own a rental property you must charge a commercial rate of rent. Otherwise, the expenditure you incur could be disallowed or reduced to an amount the Tax Office considers reasonable. The expenditure associated with a rental property normally consists of expenses, such as advertising for prospective tenants, agent’s commission to manage your property, rates and land taxes, depreciation, repairs and capital works deductions.
If you lease a residential property used predominantly for residential accommodation, you don’t need to apply for an ABN and quote it to your tenant. Under the GST provisions the transaction is classified as an ‘input tax supply’. This means you can’t charge GST on the rent you collect, and you can’t claim an input tax credit on GST you incur on your rental expenditure.
CGT is payable if you make a capital gain on disposal of CGT assets, such as shares and real estate. If you buy and sell CGT assets within 12 months, the entire gain you make on disposal is liable to tax at your marginal rates. However, if you buy and sell them after 12 months, only 50 per cent of the gain is liable to tax at your marginal rates. If you make a capital loss, the capital loss can only be offset against a current or future capital gain.