People who invest in the shares of Australian companies are able to obtain valuable tax benefits through the dividend imputation system. These benefits are available to those who invest in shares directly through buying on the Australian Stock Exchange or who buy shares indirectly by way of their investments in managed funds and superannuation.

Dividend imputation simply means that an investor in Australian shares (or share funds) is entitled to a tax rebate equal to the amount of company tax paid. Franked dividends are those paid by a company that has paid company tax.

The effect of dividend imputation can best be explained by the following example:

Depreciation Allowances

People who hold investments in property, either directly or indirectly through listed property trusts or managed funds are able to benefit from depreciation allowances. These are of two types, being depreciation on buildings and depreciation on plant and equipment in buildings.

Depreciation allowances on buildings results in a part of the rental income being tax free to the investor. Depreciation allowances on plant and equipment results in tax deferred income. Tax deferred income is tax free at the time it is received, however when the property (or property trust or fund) is sold, the profit made on the sale is increased by the amount of tax deferred income that was previously received, resulting in a higher capital gains tax liability.

Income Splitting

The purpose of income splitting is to simply spread investment income between two or more people, usually between a husband and wife.

Pensioner and Low Income Aged Person’s Tax Rebate

This rebate ensures that both age pensioners and self funded retirees are treated in a similar fashion for income tax purposes. This rebate effectively raises your tax free threshold which means that you will not pay any income tax unless your taxable income is greater than the threshold.

Capital Gains Tax

Capital Gains Tax generally applies to profits made upon the sale of any asset purchased since September 20, 1985.  Certain assets are exempt from Capital Gains Tax, the most common being your family home and motor vehicles.  Unlike other types of investment returns, only 50% of the capital gain that you make (on assets purchased after September 21, 1999 will be subject to Capital Gains Tax.  Furthermore, any costs associated with the purchase or disposal of the asset are subtracted from your profit before Capital Gains Tax is calculated.

It is worth noting that Capital Gains Tax is triggered on the disposal of an asset and therefore Capital Gains Tax liability will usually occur when investments are switched or transferred.

In order to come under the Capital Gains Tax provisions, an asset must have been held for twelve months or more before being sold, otherwise the profit will be treated as ordinary taxable income and the 50% reduction will not apply.  Another aspect of Capital Gains Tax legislation allows for capital losses to be offset against capital gains, in fact capital losses can be carried forward into future years to be offset against future capital gains.  It is important to realise that capital losses cannot be offset against normal taxable income.

Because a significant period of time may elapse between when an asset is purchased and when it is eventually disposed of, it is essential for you to keep accurate records of when an asset was purchased, the purchase price, any costs associated with the purchase, the date of sale, the sale price and any costs associated with the sale

The above is a simplified summary of some of the aspects of Capital Gains Tax, however Capital Gains Tax is exceedingly complex and you are encouraged to seek advice from a professional tax adviser in respect of your own situation.