This has got to be one of the questions we’re asked most as accountants: “How much tax do I pay on the sales of shares?” It’s a question worth investigating because the answer is (unfortunately) far more complicated than most people think.
When you invest in shares listed on the Australian Securities Exchange (ASX), you can make money in two ways.
First, through capital gains—the profit you make when you sell shares for more than you paid for them.
Second, through dividends—regular payments companies make to shareholders from their profits. Both types of earnings are taxable, but they’re treated quite differently by the ATO.
In this guide, we’ll walk you through everything you need to know about share investment taxation, including:
- How capital gains tax works and when you can claim the 50% discount
- The difference between franked and unfranked dividends
- How franking credits can reduce your tax bill
- What expenses you can claim as tax deductions
- Special rules for shares held in superannuation
- The line between investing and trading as a business
- Common tax traps to avoid
Whether you’re new to investing or an experienced trader, understanding these tax implications can help you make smarter investment decisions and avoid costly mistakes.
Tax on Shares
The amount of tax you pay on your share investments each year depends on several factors. If you earn income from shares in the form of dividends or capital gains, that investment income becomes part of your assessable income for the financial year.
Your assessable income consists of your total income from all sources before deductions and includes both dividends and net capital gains.
Your taxable income, which determines the amount of tax you owe, is your assessable income minus any allowable deductions.
Tax on Dividends
This has got to be one of the questions we’re asked most as accountants: “How much tax do I pay on the sales of shares?” It’s a question worth investigating because the answer is (unfortunately) far more complicated than most people think.
When you invest in shares listed on the Australian Securities Exchange (ASX), you can make money in two ways.
First, through capital gains—the profit you make when you sell shares for more than you paid for them.
Second, through dividends—regular payments companies make to shareholders from their profits. Both types of earnings are taxable, but they’re treated quite differently by the ATO.
In this guide, we’ll walk you through everything you need to know about share investment taxation, including:
- How capital gains tax works and when you can claim the 50% discount
- The difference between franked and unfranked dividends
- How franking credits can reduce your tax bill
- What expenses you can claim as tax deductions
- Special rules for shares held in superannuation
- The line between investing and trading as a business
- Common tax traps to avoid
Whether you’re new to investing or an experienced trader, understanding these tax implications can help you make smarter investment decisions and avoid costly mistakes.
Tax on Shares
The amount of tax you pay on your share investments each year depends on several factors. If you earn income from shares in the form of dividends or capital gains, that investment income becomes part of your assessable income for the financial year.
Your assessable income consists of your total income from all sources before deductions and includes both dividends and net capital gains.
Your taxable income, which determines the amount of tax you owe, is your assessable income minus any allowable deductions.
Tax on Dividends
Dividends are a means for a company to distribute part of its profits to shareholders. There are two types of dividends: franked and unfranked.
What Are Franked Dividends?
Franked dividends are distributions of company profits that come with tax credits attached. This means the company has already paid Australian company tax on the profits that are being distributed as dividends.
How it works:
- If a company earns $100 in profit and the corporate tax rate is 30%, they pay $30 in tax.
- If they distribute $70 as a dividend, they also provide a franking credit of $30 to the shareholders.
- Shareholders include the $100 (called the “grossed-up dividend”) as income in their tax return.
- They then claim the $30 franking credit against their tax liability, effectively avoiding double taxation on that portion of their income.
What Are Unfranked Dividends?
Unfranked dividends are company profit distributions that come without franking credits, usually because the company hasn’t paid Australian corporate tax on those profits. This commonly occurs when profits are earned overseas, through tax-exempt activities, or when a company has insufficient franking credits in its franking account.
When you receive unfranked dividends, you must include the exact amount received in your assessable income and pay tax at your marginal rate, without any credits to offset the tax. For instance, if you receive a $1,000 unfranked dividend and your marginal tax rate is 37%, you’ll owe $370 in tax on that dividend.
CHAT WITH A FRIENDLY ITP TAX ACCOUNTANT TODAY
Tax on Franked Dividends
To understand the implications of franking credits on your dividend income, let’s consider a scenario where you own shares that pay a fully franked dividend of $700. Along with this dividend, your statement also shows a franking credit of $300. This credit indicates that the dividend would have been $1,000 (referred to as the ‘grossed up’ dividend) before the deduction of company tax.
During tax time, it is important to include the $1,000 grossed up dividend as part of your taxable income. If your marginal tax rate is 32.5%, you will be taxed $325 for this dividend. However, since the company has already paid $300 in tax, you will only need to pay an additional $25 individually.
On the other hand, if your marginal tax rate is 45%, you will be liable for $450 in tax on the dividend. Consequently, you will need to pay an extra $150 in tax.
Franking credits can lead to tax refunds for shareholders in lower marginal tax brackets. For instance, if you received the $700 dividend mentioned earlier ($1,000 grossed up) and your marginal tax rate is 19%, your tax liability would amount to $190. Since the company has already paid $300 in tax, you would be eligible for a tax refund on the difference, which in this case would be $110.
Capital Gains Tax on Investments
Capital gains tax is based on an investor’s marginal tax rate, which means it is determined by the tax bracket they fall into. However, there is a special provision that allows for a 50% discount on capital gains if the investment has been held for more than 12 months.
Let’s consider an example. Imagine you made a capital gain of $10,000 from selling shares that you had held for over a year. Normally, you would be taxed on the full amount of $10,000. However, with the 50% discount, your taxable capital gain would be reduced to $5,000. This makes a significant difference in the amount of tax you owe.
Let’s delve deeper into the numbers. Suppose your marginal tax rate is 37% and you sold the shares after only 11 months. In this scenario, your tax liability would be $3,700. However, if you had waited just one more month and sold the shares after 12 months, your tax liability would be reduced to $1,850.
Pro Tax Tip: Capital gains are taxed at your marginal tax rate, however investors with higher marginal rates may be inclined to delay selling shares that have performed well until after 12 months of ownership as it results in a significantly lower tax liability. Though potentially beneficial, this approach comes with risks we’ll examine in detail in the investor psychology section below.
Capital Loss and Taxes
Let’s say an investor makes a profit from selling shares, but at the same time, they also incur a loss from selling other shares or investment assets like property. In this situation, the investor can deduct the capital loss from the capital gain, and the tax will be calculated based on the net gain.
Capital losses can be carried forward to future financial years. If an individual experiences a capital loss in a particular year but does not have any capital gains to offset it, they can carry the loss forward and use it to offset capital gains in future years.
Capital gains tax is only applicable when investments are actually sold. This means that unrealised capital gains, which are the gains that have not been realised through selling investments, can contribute to faster compounding of returns. This is particularly advantageous for long-term investors who hold their positions for extended periods, as well-managed companies tend to increase in value over time due to growing earnings. This growth in earnings can compound at impressive rates, leading to significant returns over the long term.
How Much Tax Do I Pay On Shares in My Super Account?
The rules for shares held in superannuation are notably different from those for individual investments. The tax treatment varies based on two key factors: your age and your total super balance.
When withdrawing from your super, you have two main options: taking regular payments as an income stream, or grabbing it all at once as a lump sum. For those 60 and over, income stream withdrawals are typically tax-free.
Lump sum withdrawals follow their own logic. If you’re over 60 and your super is from a taxed fund, you won’t pay tax on the withdrawal. But if you’re withdrawing from an untaxed fund (like many public sector funds), the tax office will want their share.
The government has set a transfer balance cap of $1.7 million that you can move into the retirement phase, where it enjoys tax-free status. You can keep adding to your retirement phase account, provided you stay under this cap. Think of it as the VIP room of super—exclusive access, but with strict capacity limits.
Tax Deductions for Investors
Interest Income Expenses
- You can claim a deduction for account-keeping fees on investment accounts, such as a cash management account. These fees can be found on your account statements.
- If you have a joint account, you can only claim your share of the fees, charges, or taxes on the account. For example, if you share an account with your spouse, you can only claim half of the allowable account-keeping fees.
- It is not possible to claim a deduction for interest incurred on a personal tax debt, such as a loan taken to pay personal tax debt.
Investment Seminars
- Attending an investment seminar related to an existing investment may entitle you to claim a deduction for a portion of the expenses incurred in earning investment income.
- However, you cannot claim a deduction for attending a seminar about an investment you are considering, even if you eventually invest in it.
Dividend and Share Income Expenses
What you can claim:
- You can claim deductions for costs associated with investing in shares, including ongoing management fees, fees for advice on investment mix changes, and costs related to managing your investments (e.g., travel expenses to attend company meetings, specialist investment journals, borrowing costs, internet access, and computer depreciation).
- If you received a dividend from an Australian listed investment company (LIC) that included a LIC capital gain amount, you can claim 50% of that amount as a deduction if you were an Australian resident at the time.
What you can’t claim:
- Fees for creating an investment plan are generally not deductible unless you are conducting an investment business (more on that below).
- Some interest expenses related to borrowing money under a capital protected borrowing arrangement to buy shares, units in unit trusts, and stapled securities are not deductible. These interest expenses are treated as part of the cost of the capital protection feature.
- Brokerage fees and other transaction costs cannot be claimed as deductions, but they can be included in the calculation of capital gains tax when you sell the shares.
Pro tax tip: You can’t claim a deduction for interest paid on borrowed money if you receive an exempt dividend or other exempt income.
Always keep accurate records and consult with a tax professional or refer to the relevant tax regulations to ensure compliance with the specific requirements.
The Psychology of Share Trading and Tax
Most of us would rather watch paint dry than think about tax obligations. Yet understanding the psychological impacts of tax on our investment decisions can make a substantial difference to our returns.
Timing the Market for Tax Purposes
Tax considerations often lead investors into peculiar behavioral patterns. Take the common tendency to sell losing shares in June to capture tax losses, while holding onto winners past July to defer gains. While this might feel clever, it can backfire spectacularly. The market knows this pattern exists, which means June often sees artificial downward pressure on already-declining shares, while July frequently brings a relief rally.
The smarter approach is to make investment decisions based on company fundamentals and personal investment goals, then optimise the timing around tax implications as a secondary consideration. A mediocre tax outcome on a great investment decision beats a perfect tax outcome on a poor investment choice.
Holding Out for the 12-month CGT Discount
Speaking of psychology, the 12-month CGT discount creates an interesting mental hurdle. We’ve seen countless investors hold deteriorating positions just to reach that magical 12-month mark, only to watch their paper losses grow larger than any tax benefit they might capture. The 50% CGT discount is valuable, but not when it leads to paralysis.
The most successful investors we work with treat tax as part of their overall strategy rather than letting it drive their decisions. They understand that tax efficiency matters, but they’re willing to pay their fair share of tax if it means capturing the right opportunities at the right time.
Getting Technical: Share Trading as a Business
One of the most misunderstood areas of share investment taxation is the distinction between investing and trading. The Australian Tax Office takes a keen interest in this area, and the implications can be significant.
When share trading activities constitute a business, the tax treatment shifts dramatically. Instead of capital gains tax treatment, gains and losses are treated as ordinary income and expenses. This means no 50% CGT discount, but it also means losses can offset other income rather than only being carried forward to offset future capital gains.
The ATO considers several factors when determining whether someone is running a share trading business:
- The volume and frequency of trading
- Whether there’s a business plan and proper records
- Whether you organise the activity in a businesslike way
- The amount of capital invested
- Whether you conduct the activity with commercial intent
But here’s where it gets interesting: meeting these criteria isn’t always advantageous. Some investors inadvertently push themselves into ‘trading business’ territory without realising the implications. We’ve seen cases where active investors would have been better off scaling back their trading to maintain investor status.
Benefits of Trading vs. Investing
For those running a legitimate trading business, the advantages can be substantial. All costs become fully deductible, including:
- Home office expenses
- Trading platform subscriptions
- Data feed costs
- Professional development
- Travel to investment seminars
- Computer equipment
However, the business determination is an all-or-nothing proposition. The ATO doesn’t allow splitting activities between trading and investing. Once you’re deemed to be in business, all your share activities fall under that umbrella.
Drawbacks of Trading vs. Investing
A particularly thorny issue arises with trading businesses run through self-managed super funds. The rules here are complex and the penalties for getting it wrong can be severe. The interaction between trading business rules and the concessional tax treatment of super requires careful, expert handling.
For most private investors, maintaining investor status rather than trading business status will lead to better outcomes. The 50% CGT discount is a powerful benefit that you shouldn’t discard lightly. However, for those with the right scale and systems, trading as a business can make sense.
The key is making deliberate choices rather than accidentally falling into one category or the other. Understanding where the line lies between investing and trading will allow you to structure your activities appropriately and avoid unwelcome surprises at tax time.
Tax rules can be admirably precise and maddeningly subtle at the same time. While we’ve covered the key points, there’s nothing quite like the confidence that comes from personalised advice. Whether you go with a financial advisor or one of ITP’s accountants, it can be hugely beneficial to have someone help you craft a strategy that fits your unique situation. The right professional should save you enough in tax to cover their fees. Plus, you’ll sleep better knowing you have an expert on your side.
Dividends are a means for a company to distribute part of its profits to shareholders. There are two types of dividends: franked and unfranked.
What Are Franked Dividends?
Franked dividends are distributions of company profits that come with tax credits attached. This means the company has already paid Australian company tax on the profits that are being distributed as dividends.
How it works:
- If a company earns $100 in profit and the corporate tax rate is 30%, they pay $30 in tax.
- If they distribute $70 as a dividend, they also provide a franking credit of $30 to the shareholders.
- Shareholders include the $100 (called the “grossed-up dividend”) as income in their tax return.
- They then claim the $30 franking credit against their tax liability, effectively avoiding double taxation on that portion of their income.
What Are Unfranked Dividends?
Unfranked dividends are company profit distributions that come without franking credits, usually because the company hasn’t paid Australian corporate tax on those profits. This commonly occurs when profits are earned overseas, through tax-exempt activities, or when a company has insufficient franking credits in its franking account.
When you receive unfranked dividends, you must include the exact amount received in your assessable income and pay tax at your marginal rate, without any credits to offset the tax. For instance, if you receive a $1,000 unfranked dividend and your marginal tax rate is 37%, you’ll owe $370 in tax on that dividend.
CHAT WITH A FRIENDLY ITP TAX ACCOUNTANT TODAY
Tax on Franked Dividends
To understand the implications of franking credits on your dividend income, let’s consider a scenario where you own shares that pay a fully franked dividend of $700. Along with this dividend, your statement also shows a franking credit of $300. This credit indicates that the dividend would have been $1,000 (referred to as the ‘grossed up’ dividend) before the deduction of company tax.
During tax time, it is important to include the $1,000 grossed up dividend as part of your taxable income. If your marginal tax rate is 32.5%, you will be taxed $325 for this dividend. However, since the company has already paid $300 in tax, you will only need to pay an additional $25 individually.
On the other hand, if your marginal tax rate is 45%, you will be liable for $450 in tax on the dividend. Consequently, you will need to pay an extra $150 in tax.
Franking credits can lead to tax refunds for shareholders in lower marginal tax brackets. For instance, if you received the $700 dividend mentioned earlier ($1,000 grossed up) and your marginal tax rate is 19%, your tax liability would amount to $190. Since the company has already paid $300 in tax, you would be eligible for a tax refund on the difference, which in this case would be $110.
Capital Gains Tax on Investments
Capital gains tax is based on an investor’s marginal tax rate, which means it is determined by the tax bracket they fall into. However, there is a special provision that allows for a 50% discount on capital gains if the investment has been held for more than 12 months.
Let’s consider an example. Imagine you made a capital gain of $10,000 from selling shares that you had held for over a year. Normally, you would be taxed on the full amount of $10,000. However, with the 50% discount, your taxable capital gain would be reduced to $5,000. This makes a significant difference in the amount of tax you owe.
Let’s delve deeper into the numbers. Suppose your marginal tax rate is 37% and you sold the shares after only 11 months. In this scenario, your tax liability would be $3,700. However, if you had waited just one more month and sold the shares after 12 months, your tax liability would be reduced to $1,850.
Pro Tax Tip: Capital gains are taxed at your marginal tax rate, however investors with higher marginal rates may be inclined to delay selling shares that have performed well until after 12 months of ownership as it results in a significantly lower tax liability. Though potentially beneficial, this approach comes with risks we’ll examine in detail in the investor psychology section below.
Capital Loss and Taxes
Let’s say an investor makes a profit from selling shares, but at the same time, they also incur a loss from selling other shares or investment assets like property. In this situation, the investor can deduct the capital loss from the capital gain, and the tax will be calculated based on the net gain.
Capital losses can be carried forward to future financial years. If an individual experiences a capital loss in a particular year but does not have any capital gains to offset it, they can carry the loss forward and use it to offset capital gains in future years.
Capital gains tax is only applicable when investments are actually sold. This means that unrealised capital gains, which are the gains that have not been realised through selling investments, can contribute to faster compounding of returns. This is particularly advantageous for long-term investors who hold their positions for extended periods, as well-managed companies tend to increase in value over time due to growing earnings. This growth in earnings can compound at impressive rates, leading to significant returns over the long term.
How Much Tax Do I Pay On Shares in My Super Account?
The rules for shares held in superannuation are notably different from those for individual investments. The tax treatment varies based on two key factors: your age and your total super balance.
When withdrawing from your super, you have two main options: taking regular payments as an income stream, or grabbing it all at once as a lump sum. For those 60 and over, income stream withdrawals are typically tax-free.
Lump sum withdrawals follow their own logic. If you’re over 60 and your super is from a taxed fund, you won’t pay tax on the withdrawal. But if you’re withdrawing from an untaxed fund (like many public sector funds), the tax office will want their share.
The government has set a transfer balance cap of $1.7 million that you can move into the retirement phase, where it enjoys tax-free status. You can keep adding to your retirement phase account, provided you stay under this cap. Think of it as the VIP room of super—exclusive access, but with strict capacity limits.
Tax Deductions for Investors
Interest Income Expenses
- You can claim a deduction for account-keeping fees on investment accounts, such as a cash management account. These fees can be found on your account statements.
- If you have a joint account, you can only claim your share of the fees, charges, or taxes on the account. For example, if you share an account with your spouse, you can only claim half of the allowable account-keeping fees.
- It is not possible to claim a deduction for interest incurred on a personal tax debt, such as a loan taken to pay personal tax debt.
Investment Seminars
- Attending an investment seminar related to an existing investment may entitle you to claim a deduction for a portion of the expenses incurred in earning investment income.
- However, you cannot claim a deduction for attending a seminar about an investment you are considering, even if you eventually invest in it.
Dividend and Share Income Expenses
What you can claim:
- You can claim deductions for costs associated with investing in shares, including ongoing management fees, fees for advice on investment mix changes, and costs related to managing your investments (e.g., travel expenses to attend company meetings, specialist investment journals, borrowing costs, internet access, and computer depreciation).
- If you received a dividend from an Australian listed investment company (LIC) that included a LIC capital gain amount, you can claim 50% of that amount as a deduction if you were an Australian resident at the time.
What you can’t claim:
- Fees for creating an investment plan are generally not deductible unless you are conducting an investment business (more on that below).
- Some interest expenses related to borrowing money under a capital protected borrowing arrangement to buy shares, units in unit trusts, and stapled securities are not deductible. These interest expenses are treated as part of the cost of the capital protection feature.
- Brokerage fees and other transaction costs cannot be claimed as deductions, but they can be included in the calculation of capital gains tax when you sell the shares.
Pro tax tip: You can’t claim a deduction for interest paid on borrowed money if you receive an exempt dividend or other exempt income.
Always keep accurate records and consult with a tax professional or refer to the relevant tax regulations to ensure compliance with the specific requirements.
The Psychology of Share Trading and Tax
Most of us would rather watch paint dry than think about tax obligations. Yet understanding the psychological impacts of tax on our investment decisions can make a substantial difference to our returns.
Timing the Market for Tax Purposes
Tax considerations often lead investors into peculiar behavioral patterns. Take the common tendency to sell losing shares in June to capture tax losses, while holding onto winners past July to defer gains. While this might feel clever, it can backfire spectacularly. The market knows this pattern exists, which means June often sees artificial downward pressure on already-declining shares, while July frequently brings a relief rally.
The smarter approach is to make investment decisions based on company fundamentals and personal investment goals, then optimise the timing around tax implications as a secondary consideration. A mediocre tax outcome on a great investment decision beats a perfect tax outcome on a poor investment choice.
Holding Out for the 12-month CGT Discount
Speaking of psychology, the 12-month CGT discount creates an interesting mental hurdle. We’ve seen countless investors hold deteriorating positions just to reach that magical 12-month mark, only to watch their paper losses grow larger than any tax benefit they might capture. The 50% CGT discount is valuable, but not when it leads to paralysis.
The most successful investors we work with treat tax as part of their overall strategy rather than letting it drive their decisions. They understand that tax efficiency matters, but they’re willing to pay their fair share of tax if it means capturing the right opportunities at the right time.
Getting Technical: Share Trading as a Business
One of the most misunderstood areas of share investment taxation is the distinction between investing and trading. The Australian Tax Office takes a keen interest in this area, and the implications can be significant.
When share trading activities constitute a business, the tax treatment shifts dramatically. Instead of capital gains tax treatment, gains and losses are treated as ordinary income and expenses. This means no 50% CGT discount, but it also means losses can offset other income rather than only being carried forward to offset future capital gains.
The ATO considers several factors when determining whether someone is running a share trading business:
- The volume and frequency of trading
- Whether there’s a business plan and proper records
- Whether you organise the activity in a businesslike way
- The amount of capital invested
- Whether you conduct the activity with commercial intent
But here’s where it gets interesting: meeting these criteria isn’t always advantageous. Some investors inadvertently push themselves into ‘trading business’ territory without realising the implications. We’ve seen cases where active investors would have been better off scaling back their trading to maintain investor status.
Benefits of Trading vs. Investing
For those running a legitimate trading business, the advantages can be substantial. All costs become fully deductible, including:
- Home office expenses
- Trading platform subscriptions
- Data feed costs
- Professional development
- Travel to investment seminars
- Computer equipment
However, the business determination is an all-or-nothing proposition. The ATO doesn’t allow splitting activities between trading and investing. Once you’re deemed to be in business, all your share activities fall under that umbrella.
Drawbacks of Trading vs. Investing
A particularly thorny issue arises with trading businesses run through self-managed super funds. The rules here are complex and the penalties for getting it wrong can be severe. The interaction between trading business rules and the concessional tax treatment of super requires careful, expert handling.
For most private investors, maintaining investor status rather than trading business status will lead to better outcomes. The 50% CGT discount is a powerful benefit that you shouldn’t discard lightly. However, for those with the right scale and systems, trading as a business can make sense.
The key is making deliberate choices rather than accidentally falling into one category or the other. Understanding where the line lies between investing and trading will allow you to structure your activities appropriately and avoid unwelcome surprises at tax time.
Tax rules can be admirably precise and maddeningly subtle at the same time. While we’ve covered the key points, there’s nothing quite like the confidence that comes from personalised advice. Whether you go with a financial advisor or one of ITP’s accountants, it can be hugely beneficial to have someone help you craft a strategy that fits your unique situation. The right professional should save you enough in tax to cover their fees. Plus, you’ll sleep better knowing you have an expert on your side.