What share traders should know
Everyone wants to avoid having the Australian Taxation Office (ATO) audit them. However, if you do get audited, it's important to have made all your reporting accurate and transparent. If you’re actively trading shares or investing in the stock market, it’s imperative to stay on top of your tax obligations, especially at tax time.
In this article, we look at how investors should prepare for a potential ATO audit. While every situation is uniquely different to individual investors, we have included some common indicators the ATO looks for in active traders and the most frequently occurring reporting errors investors make.
Indicators that can trigger an ATO audit
This is especially important for active traders. The ATO uses sophisticated data-matching systems to track trading activity, cross-referencing broker data, bank accounts, and international transactions. Investment income, whether in the form of dividends, capital gains tax (CGT) and even Crypto asset income, all need to be reported to the ATO just like you would report any income from property investments. While not every trader will be audited, some factors can increase your risk:
1. Frequent trading activity without proper classification
If you regularly buy and sell shares, you may be considered a trader (operating a business) rather than an investor (holding assets for capital growth). It's best to check with the ATO, your financial adviser or your accountant about which category you fall into if you're not sure.
Claiming tax benefits available to investors — such as the CGT discount — when you should be reporting income on revenue can raise red flags with the ATO. Always keep records of your trades (buy price and sell price, dates, etc) and report these if needed (speak to your financial professional for advice) so you don't get caught out.
2. Large or unusual deductions
Excessive claims for deductions like platform fees, subscriptions, or home office expenses can flag an audit, especially if they’re not proportionate to your income or trading scale. Ensure that any excessive claims can be legitimised through good record-keeping practices.
3. Inconsistent or omitted data
Discrepancies between what is reported by you and what your broker or platform reports to the ATO, such as share sales, dividends, or capital gains, can signal something is not quite right and can trigger a review.
4. International trading activity
It's not just about what you trade here at home. Investing internationally also counts towards tax time reporting. Trading in the US, HK, or any other foreign markets involves added complexity. If income or gains from international shares are missing or incorrectly converted to AUD, it may prompt the ATO to question your investment reporting. Speak to your financial advisor or accountant and ensure that all income from foreign investments is reported properly.
Errors in share reporting
Whether you're a casual investor or full-time trader, mistakes in your tax reporting can lead to audit risk or fines. Below are some of the most frequent errors to avoid:
1. Incorrectly reporting capital gains
Many investors forget to:
Include capital losses carried forward from prior years
Apply the 50% CGT discount for assets held over 12 months
Record the cost base correctly, including brokerage fees
Most of this information is found on your broker statements; however, if you're unsure, it's best to ask the professionals.
2. Missing dividend income
Fully franked dividends must be declared along with any imputation credits. Not reporting these, or failing to gross them up, is a common error made by investors and traders, and the ATO quickly picks these up through data matching.
3. Double-counting sales or using incorrect dates
Using the wrong dates for share purchases or sales (especially for DRPs or partial parcel sales) can result in incorrect gains or losses being reported. Ensure that what you report to the ATO matches what data they are receiving from your brokerage platform or other sources.
4. Failing to convert foreign income
Income or gains from overseas shares must be converted to AUD using the correct exchange rate on the date of the transaction. Using average or end-of-year rates can lead to misreporting.
5. Claiming ineligible deductions
Only expenses directly related to earning income (like trading software, data feeds, or advice for specific investments) are deductible. General financial education or personal subscriptions may not qualify.
How to prepare for an ATO audit
Even if you’ve done everything by the book, being prepared to be audited can ease the process (if it happens). Here's what to do if the ATO wants to audit you:
Keep detailed records: Store buy/sell confirmations, dividend statements, annual tax summaries from brokers, and any advice documents. See our article on record keeping to get tips on how to effectively maintain records of any purchases, sales, expenses, etc.
Reconcile with ATO data: Use pre-fill reports in myGov or check with your accountant to verify that the ATO’s records match yours.
Separate trading vs. investing activity: If you're both investing long-term and actively trading, consider separating accounts and tracking them distinctly. Separating accounts may make it easier to generate reports and keep track of any investment movement- gain or loss, as well as any additional expenses or income received via your investment or trade.
Work with a tax professional: An accountant or financial advisor with experience in share trading and CGT reporting can help ensure your reporting is compliant and reduce any audit risks.
ATO audits may sound alarming. However, if accurate records are kept, you're careful with reporting, and have a clear understanding of the ATO rules, there should be nothing to worry about when it comes to tax time. A proactive approach, whether you're a trader or investor, ensures that your investment reporting is in order and concise, and you avoid any potential audit issues or fines. Remember, the ATO can audit individual investors dating back to two years (this is four years for businesses), so it's best to ensure you keep records clear and easily accessible in case you require them.
As always, it is recommended that you speak to your accountant or financial advisor if you have any questions or concerns.
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