DRIP - Value Your Business & Time

Tax Treatment

DRIP investors need to maintain record keeping by their investments and reinvestments made. The cost basis of the share will vary and needs to be kept track in order to calculate capital gains when the shares are finally sold. The dividend earned or reinvested is an income and assessable for tax. These dividends can either be partly or fully franked under Australian tax laws.

Account Statements:

Each time a transaction occurs the company will provide with updated Account Statements for the financial year.

Capital Gains

Capital Gains are overlooked by investors and its one of the most important tax consequence of DRIPs. Investors are more concerned about expanding their investment while involved in a DRIP but in the long term selling must also be a secondary consideration.

Capital gains are calculated as

Capital Gain = Sell Price ­– Indexed Purchase Price

Moreover, if the shares are held for more than 12 months it may be applicable for CGT discount. CGT operates on the taxable income in the financial year and when the asset is sold or otherwise disposed of. Capital losses can be offset tax on any other income. If you do not offset any capital losses against capital gains in the current year, it can be carried forward to next year.

Descriptions on tax based transaction types:

Dividends earned or collected: Dividends whether reinvested or not, it is considered as form of income. The amount will be taxed up to marginal tax rate 45% from July 1, 2006 by Australian Tax law.

Dividend reinvestment: The dividend is further reinvested to buy more shares and when the shares are sold then it will be eligible for capital gain taxing on the cost basis of share.

Commission: When commission is paid by the DRIP Company it is considered as dividend income. The commission (brokerage fees) paid reduces the cost basis of the shares whether paid or sold, thereby reduce capital gains when shares are sold.