When you're reviewing your investments, it's important to remember that income and returns come from two main sources, Capital Gains and Interim Income.
Capital gain (or loss)
This is the difference in the overall value of your investment between when you purchased it and now (or the date that you sold it.) You can work it out as:
((Current or sale price per unit - purchase price) * number of units) - fees and taxes
For example, let's assume that you purchased 100 shares of Amazing Blue Widget Co. for $50 each and then sold them for $80 each. You had to pay $10 to buy, $10 to sell and 15% tax on the profit, this would work out to: (($80 - $50)*100) - $20 - $450 = $2,430 or a return of 48.6% on your original $5,000 investment.
Interim income (dividends, interest etc.)
This is the amount that you've received in interim payments over the life of your investment. It's calculated as:
(Interim % * value of investment) - taxes
You would need to work this out for each interim payment that you receive.
For example, let's assume that you've held 100 ABWC shares for three years, and that they paid dividends of 3% a year; in the first year the shares were $50 each, in the second, $60 each and in the third $80 each. Your return would be: 3% of $5,000, $6,000 and $8,000 less tax; this works out to: $485.
Your total return
This is equal to your capital gain (or loss) plus your interim income. You can then compare this to your original purchase price to understand what percentage gain or loss that you've made.
For example, your purchase price of ABWC shares was $5,000; over three years, you've made $2,430 in capital gains and $485 in interim returns (dividends) for a total of $2,915. That's an increase of 58.3% over three years, or 19.4% a year - Not bad!
You should compare your total return to your targets and life goals. This can help you decide if you should keep your investments, or if it would be wise to sell them.
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The Tax Office has fired the first warning shot in the war against naive, deceptive and dishonest taxpayers, revealing its targets for 2013/2014.
The big picture or big brother?
Fundamentally, the way the Tax Office addresses compliance has changed. Gone are the days of comprehensive audits and visits. Instead, most compliance issues are identified by data-mining. In essence, the Tax Office looks at the information you report relative to a myriad of other information sources. Firstly, to identify differences between the information you report and the information held by third parties. And secondly, to identify whether your information is consistent with industry norms and patterns of behaviour. Once you are identified as being a potential problem, you are contacted by the Tax Office and asked to explain. The issue is then closed if not further action is warranted or progressed to the next step. Human intervention is for high risk taxpayers.
There are very few data sources the Tax Office does not have access to. Past data programs have included bank information (particularly low doc loans), credit card data, car and property sale data and much more. This year the Tax Office are looking at:
• private health insurance rebate claims
• flood levy exemptions
• taxable government grants and payments
• payments to contractors in the building and construction industry.
Trusts under attack
The number of trusts in Australia has grown and with it Tax Office concerns about their use. The Budget provided an additional $217m for a Trust Task Force and the Tax Office plans to put that into good use. Of particular concern to the Tax Office is the use of trusts to conceal income, mischaracterise transactions, artificially reduce trust income amounts and underpay tax. This year, there will be around 5,000 data-matching cases alone.
Building & construction industry
It’s the first full year of the new contractor reporting regime for the building and construction industry. The Tax Office will be using this data to review what contractors are reporting to identify under reporting.
The wealthy & complex business structures
The Tax Office has stated that “the blurring of distinctions between business and personal income and expenses is a common issue attracting our attention.”
This means that high income individuals who utilise trust, company and other structures will come under close scrutiny. For taxpayers affected, it will be important to make sure that there is clarity and documentation to support the flow of money from various entities to shareholders and beneficiaries.
Self funded retirees and tax planning
It seems that many self funded retirees are accessing tax planning schemes that promise high income returns and significant tax deductions. The Tax Office stands by the adage that if it looks too good to be true it probably is.
Online and global business – including e-business
Profit shifting - where businesses shift profits from Australia to another country to reduce their tax liability - is a major focus for this financial year. Already we have seen legislative changes designed to tighten the Tax Office’s controls in this area. Interestingly, it’s not just the big boys being targeted but the myriad of Australian online businesses that work globally.
The Tax Office is concerned about businesses reclassifying revenue and capital items to access concessional tax treatments. In other words, they think more people are accessing the CGT concessions than there should be. In addition, they are concerned about reclassifying revenue and capital items. So, if you have sold business assets, you can expect the Tax Office to be looking closely at how those proceeds are managed and taxed.
Income from overseas
Income from foreign sources is on the Tax Office watch list once again. The Tax Office is making sure that all taxable income is reported regardless of its source.
Changing business structures
Simply changing business structure could attract the Tax Office’s attention this year. In particular, complex business structures and changes will come under scrutiny where one of the impacts is on the tax paid by the entity.
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