How To Claim Investments And ETFs On Australian Tax Returns

In this blog, you will learn how to claim investments and ETFs on Australian Tax Returns. The ATO has found an increasing number of people are investing in shares or Exchange Traded Funds (ETF)

Yet many often misunderstand their tax obligations when reporting capital gains from the sale of shares as well as income in the form of dividends and distributions. The growth of micro-investment platforms has helped a record number of new investors enter the market. But, first-time investors often don’t understand their tax obligations. That is to say, they don’t keep appropriate records and are likely to make mistakes when lodging their tax returns.

The ATO receives data from ASIC, brokers, exchanges and share registries, on dividend payments and the purchase and sale of shares. This tax time information on 5.8 million transactions will automatically be added to the tax returns of 612,000 taxpayers. That is to say, while this data makes tax time much simpler, it is still important for investors to check that all their relevant data has been included. Now let us move forward from how to claim investments and ETFs on Australian Tax Returns.

What Are ETFs?

Above you learnt about how to claim investments and ETFs on Australian Tax Returns. Furthermore, we will learn what are ETFs. ETF is short for Exchange Traded Fund. To sum up, it is just like a stock and can be traded on the stock market. They pool the financial resources of several people and use them to purchase various tradable monetary assets. It is an appealing option for investors with limited expertise in the stock market.

They offer low-cost access to thousands of different types of investments and are an increasingly popular investment option among millennials. Investors buy units in the ETF using the micro-investing app on their phones. Therefore, at tax time, they provide investors with a Standard Distribution Statement (SDS) that breaks down what they need to declare in their tax returns. That is to say, when an investor disposes of units, the SDS will show the capital gains or losses made from the sale of the units which also need to be included in tax returns.

People might understand how to claim investments and ETFs on Australian Tax Returns. But, many taxpayers do not know that while they must pay tax on any money earned from selling shares. They must also pay tax on dividends and distributions. That is to say, even if they are automatically reinvested into a reinvestment plan, for tax purposes, they should still be treated the same way as receiving cash.

How Do ETFs Work?

You learnt how to claim investments and ETFs on Australian Tax Returns. But you might be wondering how do ETFs work. To sum up, they have the same features of both shares and mutual funds. They are generally traded in the stock market in the form of shares produced via creation blocks. In addition, ETFs are listed on all major stock exchanges and can be brought and sold as per requirement. The changes in the share price of an ETF depend on the costs of the underlying assets present in the pool of resources. That is to say, if the price of one or more assets rises, the share price of the ETF rises proportionately and vice-versa.

In addition, the value of the dividend received by the share-holders of ETFs depends upon the performance and asset management of the concerned ETF company. They can be actively or passively managed as per the company norms. Actively managed ETFs are operated by a portfolio manager, after carefully assessing the stock market conditions and undertaking a calculated risk by investing in the companies with high potential. On the other hand, passively managed ETFs follow the trends of specific market indices, only investing in those companies listed on the rising charts.

What Are The Types Of ETFs?

We have learnt everything there is about ETFs from how to claim investments and ETFs on Australian Tax Returns to the basics such as what ETFs are and how they work. Now we will be learning about the different types of ETFs. There are various types of ETFs available to investors that can be used for income generation, speculation, price increases, and to hedge or partly offset risk in an investor’s portfolio. Below is a short description of some of the ETFs available on the market today.

• Bond ETFs

They are used to provide regular income to investors. Their income distribution depends on the performance of underlying bonds. This type of ETFs might include government bonds, corporate bonds, and state and local bonds also known as municipal bonds. But these do not have a maturity date and are traded at a premium or discount from the actual price.

• Stock ETFs

They comprise a basket of stocks to track a single industry or sector. For example, a stock ETF might track automotive or foreign stocks. The aim is to provide diversified exposure to a single industry, one that includes high performers with potential for growth. In addition, unlike stock ETFs have lower fees and do not involve actual ownership of securities.

• Industry ETFs

Industry or Sector ETFs are funds that focus on a specific sector or industry. For example, an energy sector ETF will include companies operating in that sector. On the other hand, similar to Stock ETFs, these do not involve direct ownership of securities either.

• Commodity ETFs

As their name indicates, commodity ETFs invest in commodities like crude oil or gold. They provide several benefits. For example, they can provide a cushion during a slump in the stock market. Above all, it is cheaper to hold the shares in a commodity ETF compared to physically possessing the commodity.

• Currency ETFs

These are pooled investment vehicles that track the performance of currency pairs, consisting of domestic and foreign currencies. These serve multiple purposes and can be used to read on the prices of currencies based on political and economic developments for a country. Some of them are also used to hedge against the threat of inflation.

• Inverse ETFs

Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price. That is to say, they are bets that the market will decline. When the market declines, an inverse ETF increases by a proportionate amount. Investors should be aware that many inverse ETFs are exchange-traded notes (ETNs) and not true ETFs. An ETN is a bond but trades like a stock and is backed by an issuer like a bank.

Now you know how to claim investments and ETFs on the Australian Tax Returns.