With the tax season upon us, resident expert Adrian Raftery, aka ‘Mr Taxman’, offers valuable tips for traders.

Trader or investor?

The distinction between traders and investors is significant for tax purposes as you deal with gains and losses differently.  In financial years where shares rise, it is quite common for taxpayers to try and class themselves as an investor to try and get the 50% capital gains tax concession for investments held greater than 12 months.  If an Australian Taxation Office (ATO) audit finds that you have incorrectly classified yourself as an investor, then your concession will be disallowed and penalties may apply.

Claim those expenses

Your net trading income should be shown in your annual tax return and added to your other assessable income and taxed at your marginal tax rate.  Make sure that you don’t forget to offset any expenses that you have incurred in gaining this income such as internet, journals, subscriptions, telephone and depreciation on your computer and any other equipment.

Use a company

Most traders when they first start out are also working full time and trading with their spare cash.  Whatever profits you make are taxed at your marginal tax rates, so someone earning over $180,000 can expect to pay a whopping 46.5% tax on any trading profits. If you are in that boat, then perhaps consider trading via a company and limit your tax rate to 30%.

Crystallise those losses

If you made some trading profits on the stock market this year then you can reduce tax by selling any non-performing shares that you may be holding. Any unrealised gains should be sold after 1 July to defer tax for another year.

Declare overseas trading

If you are an Australian resident, you are taxed on your worldwide income.  As a result any foreign trading income will need to be included in your Australian tax return as assessable income. Over the last few years, the ATO has been targeting Australian residents who earn income overseas.  They have tax treaties with 46 countries that allow them to exchange information about offshore income and transactions. Any data received is matched against Australian tax returns.  The ATO also receives information from AUSTRAC which monitors domestic and international transactions over $10,000.  Gone are the days of trying to hide the income from the taxman.

Prepay expenses

Sometimes trading profits are quite bumpy and not very persistent – one year you make plenty but the following one you struggle. In a perfect world it would ideal to smooth your income. In good years consider doing some tax planning by prepaying some of your expenses up to 12 months in advance such as subscriptions or interest on borrowings.

A super idea

For those under 50 years of age you can contribute up to $25,000 per year into super which is only taxed at 15%. This figure increases to $50,000 if you are over 50. If you are an employee then you must contribute to super via salary sacrifice. Build your nest egg quickly and you could consider trading via your own Self Managed Super Fund one day.

These tax tips are provided by Mr Taxman, Adrian Raftery, author of 101 Ways to Save Money on Your Tax - Legally!

To read Mr Taxman's regular Trading Tax Q&A column, subscribe to YTE by clicking here.