Brokerage fees tax deductible?

[rock86]

I had two hefty direct debit rejection fee from CommSec last FY, is that tax deductible in any way?

I would say they are, if you incurred them in buying/selling your shares (which I'm guessing you eventually did) they would be deductible, they are just like late fees etc. Aren't 100% sure though

 

[Krusty the Klown]

100% deductible.

The question is in what manner can they be claimed?

If the fees can be attributed to the purchase of a certain parcel of shares then they must be added to the cost base of that asset for CGT purposes.

Any expense directly attributable to a capital item must be added to the cost base (including margin loan interest!!!!!).

If the purchase did not go through and no asset was purchased, then they can be claimed as an administration expense or general deduction in the activity of generating assessable income.

 

[SilverRanger]

Thanks for the info Krusty, but I am not sure about margin loan interest adding to the cost base though, looking at http://www.ato.gov.au/content/downloads/IND00191825n26320609.pdf it seems like margin loan interest is used to offset dividend (ie income)
Maybe I am missing something?

 

[jono1887]

Thanks for the info Krusty, but I am not sure about margin loan interest adding to the cost base though, looking at http://www.ato.gov.au/content/downloads/IND00191825n26320609.pdf it seems like margin loan interest is used to offset dividend (ie income)
Maybe I am missing something?

I just read this a few days ago... does this mean we are only able to make deductions on our dividends and not on the capital gains?

 

[Krusty the Klown]

Thanks for the info Krusty, but I am not sure about margin loan interest adding to the cost base though, looking at http://www.ato.gov.au/content/downloads/IND00191825n26320609.pdf it seems like margin loan interest is used to offset dividend (ie income)
Maybe I am missing something?

No, you are correct, humble apologies.

If you received dividends (ordinary income) then you can claim the margin loan interest as a general deduction. If no ordinary income is received then add the interest to the cost base.

Either way the end result is the same.

I was thinking in terms of capital assets in general when writing that line. For example if you buy a piece of equipment for $50K with a loan, use it, then sell it for $75K, you add the interest on to the cost base to claim the deductible expense.

I just read this a few days ago... does this mean we are only able to make deductions on our dividends and not on the capital gains?

No, it depends on the expense. It's complicated, and depends on your situation. I don't have the time now, but will come back and elaborate.

 

[jono1887]

No, it depends on the expense. It's complicated, and depends on your situation. I don't have the time now, but will come back and elaborate.

ok... ill be waiting

 

[Krusty the Klown]

I just read this a few days ago... does this mean we are only able to make deductions on our dividends and not on the capital gains?

Ok, any reasonable expense incurred while generating assessable income is deductible in some way, by reasonable I mean directly related, for example you can't claim aspirin because doing paperwork gives you a headache!

The key is how to apply the deduction. The deduction can be deducted against either ordinary or statutory income.

Ordinary income is of a repetitive, regular, periodic and similar nature. Like daily sales for a business, or wages or salary. It is income that is generally accepted by society as being income and subject to income tax.

Statutory income is assessable income by way of a government passing a law that says it is assessable income. And here we are talking about one off extra-ordinary transactions such as a capital gain on disposal of an asset. Something that you don't receive every day like ordinary income.

A capital gain only became assessable in 1985 (thanks, Mr Keating!).

The simplest way to approach a deduction is to match the deductible expense to the source of assessable income:

- If the expense was incurred while generating ordinary income, then apply the deduction to ordinary income and claim as a general deduction.

- If the the expense was incurred in the act of generating statutory income then the deduction must be applied to statutory income and added to the capital cost base.

Generally, however, administration expenses incurred while generating statutory income (such as regular share trading) can be claimed as a general deduction as you cannot tie these expenses to one particular asset.

For CGT purposes the cost base of an asset consists of 5 elements:

First element - Acquisition cost: the actual price paid for the asset, or market value when the asset was received.

Second element - Incidental costs: any cost involved in the purchase or sale of the asset. Adviser fees, stamp duty, legal fees, marketing expense, valuations, brokerage, conveyancing, loan fees

Third element - Ownership costs: the costs involved in keeping, maintaining or protecting the asset. Insurance, interest, land tax, rates, repairs and maintenance, inspection costs, travel and accommodation expense

Fourth element - Enhancement costs. Any capital improvements. Obviously this is not relevant to this forum, but applies to real property and physical assets, such as an extra room on a building, or a dwelling on land.

Fifth element - Sci-Fi movie starring Bruce Willis, no just kidding - Title costs. Any cost involved in establishing, preserving or defending legal ownership of the asset.

As the tax laws are meant to be "catch all" provisions, meaning they try to cover every possible situtation, there is always going to be some ambiguity, such as a "what if?" or a "yeah but". So it is possible that you could apply a deduction to either ordinary or statutory income, depending on your situation, as mentioned earlier with margin loan interest.

There may be a case where you trade the same share several times, but one time you receive dividends while holding, you can claim margin loan interest as a general deduction as you received ordinary income, but in another trade you received nothing - then you can add the interest to your cost base.

Having said that, if you hold a share and incur margin loan interest, and the company does not issue a dividend that does not mean you ALWAYS have to apply the interest to the cost base. As long as there is a reasonable likelihood or expectation that a company will issue dividends then you can claim the interest as a general deduction. It comes down to how YOU interpret the law.

Another way to think of the tax laws, is to keep in mind something you hear in legal circles. Sometimes you go and see a lawyer for an "opinion" on how the law relates to your situation. Tax law is no different. As long as you stay within the law, the laws may relate to you very differently to someone else.

Hope this helps.

 

[Chorlton]

For your internet costs, you will have to work out the % of time you spent on trading or investing and then the % of time used for personal use. You can claim the % of usage for trading as an ordinary deduction.

It doesn't matter if you did not receive dividends, as a capital gain is assessable income.

Hi Krusty,

Some great replies on this thread from you !! Can I ask what your profession is? Are you an Accountant / Tax Advisor or just someone who obviously has a very good understanding of the current system? ;-)

One question I do have regarding your reply above about claiming Internet / Trading Software/ etc costs as an ordinary deduction is what do I offset these costs against? If I haven't received any dividends (and as my primary source of income is not related to trading) can I offset these costs against any Capital Gains I have made in the same year?

If so, in its simplest form is it just a case of:

Gross Capital Gain for tax year = $x
Internet / Software Costs for Tax year = $y
Net Capital Gain for tax year = $x - $y

Sorry for the basic question.....

 

[Krusty the Klown]

Thanks Chorlton, yes I am an accountant (with too much time on his hands!).

In terms of your mentioned expenses these can be claimed as general deductions. These expenses - internet fees and trading software cannot be attributed solely to one capital asset, so they can be claimed as administration expenses.

You incurred these costs while generating assessable income, be it capital gain or ordinary income, and as a home trader, you cannot trade without them, so you can't apply them to any one asset as it is an ongoing expense. For example what about when you are not holding any shares at all at one point in time.

Having said that however, there is an argument, that the software itself could be a capital asset in its own right. So instead of claiming a deduction in one year, you claim depreciation over a number of years. Again a murky one, if it not very expensive, then a one-off deduction should be OK. But if you spent $25K on purpose built software, that would probably have to be depreciated over successive periods.

In terms of deductions keep in mind any expense that is SOLELY attributable to an identifiable asset, then use the capital gains provisions. If the expense is incurred managing A NUMBER of assets (share parcels) then it is an administration expense and the provisions for general deductions apply - including depreciation of your computer.

In summary, administration expenses for share trading if only capital gains are generated can be claimed as a general deduction against ordinary or wage or salary income.

 

[MITCH027]

Hi all,

If anyone is interested:

Taken from the ATO website - under NTLG Minutes 27 March 2009 (can't link directly as I have less than 5 posts)

"Post meeting update

The following response to the agenda topic was forwarded to NTLG members on 7 May 2009.

The Tax Office accepts that brokerage costs are deductible under section 8-1 of the ITAA 1997 when incurred by an Australian resident employee in selling qualifying shares or rights in circumstances where the discount is included in the employee’s assessable income under the provisions of section 139B(3) of the ITAA 1936 and the qualifying shares or rights are disposed of within 30 days of the cessation time (section 139CC(3))."

___

However I assume that if this is the case, when you are calculating your gains during the year, brokerage fees cannot be included in your cost base in transaction costs. (this might be problematic if your broker is automatically including brokerage fees in the cost base already)

(In other words this probably has very little effect over the course of a financial year as you're getting the deduction one way or another)

 

[Krusty the Klown]

Hey Mitch

The quote seems to be referring to an employee share issue and deductibility on cessation of employment - without further clarification of course.

The ATO quote is quite specific and not applicable to the ordinary share holder - as opposed to an employee share holder.

Definitely relevant for people in that situation, but much more information and more context is needed.

Cheers

Krusty

 

[matt88]

Share Trader: Calculating Brokerage Deductions for Tax Return

Ive recently changed accountants whilst self-employed as a share trader and am now getting conflicting advice from my new accountant.

Perhaps someone with accounting experience could reply to the following simple example of how to apply brokerage deductions.

Say I buy $10,000 worth of shares at a cost (brokerage) of $100 - I actually spend $10,100. In the same financial year, I sell the shares for $12,120 at a cost of $120, realising $12,000.

It has cost me $220 to buy and sell - this is my deduction, but what is the "profit" figure this is deducted from?

My previous accountant deducted brokerage from "profit" of $2,020 (12,120 - 10,100).

My new accountant proposes to deduct brokerage from "profit" of $2,000 (12,000 - 10,000)

Two questions:
1. Who is correct?
2. Someone is making a mistake, who bears the liability for this in the end? The client?

Thanks,

Matt

 

[skc]

Re: Share Trader: Calculating Brokerage Deductions for Tax Return

Ive recently changed accountants whilst self-employed as a share trader and am now getting conflicting advice from my new accountant.

Perhaps someone with accounting experience could reply to the following simple example of how to apply brokerage deductions.

Say I buy $10,000 worth of shares at a cost (brokerage) of $100 - I actually spend $10,100. In the same financial year, I sell the shares for $12,120 at a cost of $120, realising $12,000.

It has cost me $220 to buy and sell - this is my deduction, but what is the "profit" figure this is deducted from?

My previous accountant deducted brokerage from "profit" of $2,020 (12,120 - 10,100).

My new accountant proposes to deduct brokerage from "profit" of $2,000 (12,000 - 10,000)

Two questions:
1. Who is correct?
2. Someone is making a mistake, who bears the liability for this in the end? The client?

Thanks,

Matt

What? They are both wrong! Your gross profit is $12120 - $10000 =$2120. Your brokerage costs total $220 so net taxable income is $1900.

This is not even accounting, this is barely grade 3 maths. In both cases they have double-deducted one side of the commission. If they are my accountants i would slap them in the face and demand to see proof that they graduated from primary school

If they over deducted for you then you are liable to pay any additional tax. But there are grounds for them to be liable for any penalty or additional expense incurred (like hiring a real accountant to re-do the tax.

 

[drsmith]

Re: Share Trader: Calculating Brokerage Deductions for Tax Return

What? They are both wrong! Your gross profit is $12120 - $10000 =$2120. Your brokerage costs total $220 so net taxable income is $1900.

From someone who graduated primary school (I still have the certificate to prove it), that at least makes sense.

 

[tinhat]

Re: Share Trader: Calculating Brokerage Deductions for Tax Return

Ive recently changed accountants whilst self-employed as a share trader and am now getting conflicting advice from my new accountant.

Perhaps someone with accounting experience could reply to the following simple example of how to apply brokerage deductions.

Say I buy $10,000 worth of shares at a cost (brokerage) of $100 - I actually spend $10,100. In the same financial year, I sell the shares for $12,120 at a cost of $120, realising $12,000.

It has cost me $220 to buy and sell - this is my deduction, but what is the "profit" figure this is deducted from?

My previous accountant deducted brokerage from "profit" of $2,020 (12,120 - 10,100).

My new accountant proposes to deduct brokerage from "profit" of $2,000 (12,000 - 10,000)

Two questions:
1. Who is correct?
2. Someone is making a mistake, who bears the liability for this in the end? The client?

Thanks,

Matt

What? They are both wrong! Your gross profit is $12120 - $10000 =$2120. Your brokerage costs total $220 so net taxable income is $1900.

This is not even accounting, this is barely grade 3 maths. In both cases they have double-deducted one side of the commission. If they are my accountants i would slap them in the face and demand to see proof that they graduated from primary school

If they over deducted for you then you are liable to pay any additional tax. But there are grounds for them to be liable for any penalty or additional expense incurred (like hiring a real accountant to re-do the tax.

I look at it slightly differently (but same end figure) from the point of view of the shares being an asset from a capital gains tax perspective:

Total cost of acquiring the asset (asset cost base) is $10,100
Net proceeds of sale of the asset (triggering the CGT event) is $12,000
Capital gain is $1,900

If however you are share trading as an occupation (which matt88 says he is) and you are registered for GST then I would imagine you would need to account for things differently because you would be claiming a credit (partial credit anyway if you meet the financial acquisitions threshold) for the GST paid on your brokerage. See http://www.taxreporter.com.au/articles/tax-matters/your-questions-to-atr Also:
http://www.ato.gov.au/superfunds/Pr...nds&doc=/content/00144317.htm&page=5#P65_3228
http://law.ato.gov.au/atolaw/view.htm?docid=GST/GSTR20039/NAT/ATO/00001

I would imagine then that you would deduct brokerage as an expense as there would be no CGT accounting.

Technically a SMSF trustee can register for GST and claim partial credit on brokerage, but in my case it is just not worth the hassle for a couple of hundred dollars a year. It's all very technical and would require additional accounting advice.

 

[pixel]

I have to agree:
If it was my accountant, I'd look for a new one: one who has mastered the basics of arithmetic.
You bought the shares for $10,100 and sold them for $12,000 - both net of costs. Makes your profit $1,900.

I disagree however with tinhat about GST being too much hassle for a few 100 bucks.
(a) It doesn't cost anything to register for GST (assuming you qualify).
(b) Provided you keep proper records of your trades including GST in brokerage, calculating G13 in your quarterly BAS is a cinch.

As soon as the refund comes in - usually a week after I submitted BAS - I enter the amount as a deduction from my total business costs. That's all there is to it.