Many Australians don’t just have income from wages and salary. There are many sources of income that can be earned, which includes income from dividends, bank interest, investments and rent.
When you lodge your tax return, all income will need to be added to form your gross income. Your gross income is what’s needed to work out your tax obligations, as well as what particular deductions can be claimed on earning that income. The good news is, while interest, dividend and investments increase your gross income they also have expenses that can be claimed.
Interest on your money is paid to you by a bank or financial institution. If you have savings you’ve probably earned interest. You’ll need to report it. The ATO use data matching software and compares it to your declaration, so it’s important not to forget to declare interest.
Your bank or financial institution will send you a financial declaration at the end of the financial year, either in paper form or electronically. You can always ask them directly if you don’t receive any notification.
A tax agent will be able to see most bank interest income on your ATO account when they help you lodge your tax return if you forget.
Pro Tax Tip: If you share a bank account, you’ll need to share your bank interest when they lodge their tax return.
When you calculate your interest income, do not deduct the fees or charges from the gross interest amount. If you didn’t supply your bank with your Tax File Number (TFN), they will have already taken out tax at the highest marginal rate from your interest payments. A tax agent can claim that tax back if this is the case when they work out your tax return.
Pro Tax Tip: Foreign residents will not need to include bank interest in their tax returns if tax has already been deducted from their native country. If no tax has been deducted, you’ll need to still declare the interest as it will be taxed by the ATO.
A third of Australian’s own shares, and many receive dividends on their shares. A dividend is a distribution of money usually from stock that a public company pays to shareholders. The company may distribute cash, stock, property, or any combination of these things to the company’s shareholders on their profit.
Some dividends are paid to shareholders on the company’s profit, which has already had company tax paid at the tax rate of either 25% or 30% from 2022 onwards. Dividends that have already been taxed are known as franked dividends. Franked dividends have a franking credit attached, representing tax paid by the company.
If you receive a franked dividend, you’ll be able to claim a rebate for the tax paid by the company on their distributed profits on their dividends. If a shareholders tax rate is less than the companies tax rate, the ATO will refund the difference. If your tax rate is above the corporate tax rate, you could potentially need to pay tax on the dividends.
Pro Tax Tip: A company will need to send out a distribution statement which contains information about the paying company and details of the dividend, including the amount of the franking credit.
The relevant dividend payments could already be available when you lodge your tax return because many companies are obligated to provide the ATO with this information. Not all dividends are franked. This means that dividends are not always taxed on profits, and then distributed to shareholders. If you receive an unfranked dividend, you’ll need to declare the income when you lodge your tax return.
As well as interest and dividend income, the ATO regards income from rent, managed funds, capital gains from property, shares and cryptocurrency to be assessable income. Tax paid from these income streams is set at your nominal rate. If assets are held with another person, the income should be proportioned accordingly, and you’ll be taxed on your share only.
Pro Tax Tip: Don’t forget to declare income whether it’s paid directly to you or through a third party distributor, such as a partnership or trust.
Money earned through rent should be declared in full. Rent includes money earned on short-term rentals, through property sharing platforms such as AirBNB, HomeAway of Flipkey. Renting part of your home and any formal or domestic arrangements should also be included.
Income isn’t always regarded as cash payments. If you receive goods or services in return for rent, you’ll need to work out the monetary value. Payments not made in cash could be from bond money, insurance payouts, retained letting and booking fees, relief disaster funds, payments received for repairs and maintenance, government rebates, lump sum payments and any recourse debt payments due to property damage.
Pro Tax Tip: Foreign residents can claim a foreign income tax offset for tax paid on rental income from another country. There are rules that apply for claimable rental expenses if you claim against a foreign income.
You may have received a capital gain on property sold. Capital gains are taxed at your marginal tax rate. The ATO has information to work out capital gains on different investments.
Pro Tax Tip: If you’ve held the property for more than 12 months, you’ll be taxed on half of the capital gain.
If you’ve made a capital loss, that is if you’ve sold the property for less than you bought it, you can use the loss to reduce capital gains made in the year of loss or carry forward the loss to offset future capital gains.
Because interest, dividends and investments incur an income, they also attract tax deductions.
Depreciation – Assets can be depreciated over a period of time. The ATO sets the timing and amount allowed for depreciating certain assets.
Capital Works Depreciation – Rental property renovations, additions and capital repairs not only add value to your property, but can be written off gradually over time per year similar to depreciation but at a lower rate than plant and equipment.
Plant and Equipment Depreciation – replacing appliances such as dishwasher, hot water system, air conditioning, furniture items etc can be depreciated over time where the items cost over $300 per item including installation charges.
Fees and charges – Any professional fees you incur are legitimate claimable expenses. These include accounting, letting fees, property agent’s fees and charges, council rates, utility costs, insurances, phone and internet, pest control, land tax, tax advice, garden maintenance and body corporate fees.
Interest on loans – interest your bank or financial institution charges can be claimed because it’s used to generate an income. Interest should be apportioned to the time the property is rented, or when income has been generated. If the loan is used for both rental and private purposes, only the rental portion can be claimed.
For all of your investments, you must keep records to show how much you paid for your investment, how much it was sold for, your income earned for each investment and the expenses you’ve incurred on these investments.
Income earned on interest, shares and investments can be used effectively if you plan for tax-effective investments that can either reduce your marginal tax rate or already be taxed to reduce any tax payable on the difference when you lodge your return. An ITP tax accountant will help you plan tax-effective strategies based on your financial goals, risks and expected returns.