You may be aware that the interest income you earn on investment instruments such as fixed deposits, recurring deposits, bonds, etc. are subject to tax. You also need to disclose the details of interest income in your income tax return. Show
Lower tax on your investments can help you reach your financial goals sooner. But don't choose an investment based on tax benefits alone. How investment income is taxedYou need to include investment income in your tax return. This includes what you earn in:
You pay tax on investment income at your marginal tax rate. You're allowed tax deductions for the cost of buying, managing and selling an investment. But there are rules around what you can and can't claim as a tax deduction. See the Australian Taxation Office (ATO)'s investment income deductions. Investing and tax can be complex. See choosing an accountant for where to go for help. Making capital gains or lossesCapital gainsIf you sell an investment for more than the cost to acquire it, you make a capital gain. You need to include all capital gains in your tax return in the year you sell the investment. Capital gains are taxed at your marginal rate. If you've held the investment for more than 12 months, you're only taxed on half of the capital gain. This is known as the capital gains tax (CGT) discount. The ATO has information to help you work out your capital gains tax on different investments. Capital lossesIf you sell an investment for less than the cost to acquire it, you make a capital loss. You can use a capital loss to:
Savannah makes use of a capital loss Savannah bought $2,000 worth of shares (50 shares at $40 per share) in a large mining company. After 18 months she sold the shares. They had fallen in price to $20 per share. She made a capital loss of $1,000. Savannah also made a profit of $1,500 from selling others shares she held. She had held these shares for five years. Savannah can deduct the $1,000 she made a loss on from the $1,500 capital gain. This leaves her with a profit of $500. As Savannah held the shares for more than 12 months, she only includes half the capital gain in her tax return. She'll pay tax on this $250 at her marginal tax rate. Positive versus negative gearingPositive gearingPositive gearing is where you borrow money to invest and the income from the investment (for example, rent or dividends) is more than the cost of the investment (interest and other expenses). If you're positively geared, you'll have extra money coming in. But you'll also have to pay tax on this income at tax time. Negative gearingNegative gearing is where you borrow to invest and the investment income is less than the cost of the investment. Investors negatively gear as they can generally claim a tax deduction for the investment loss. The aim is for the capital growth to offset the loss in earlier years. If you're making an investment loss, it is still costing you money. You'll need to have cash from other sources, like your salary, to cover interest and expenses. Tax-effective investmentsA tax-effective investment is one where the tax on your investment income is less than your marginal tax rate. Choose investments based on your financial goals, risks you're comfortable with and expected returns. Tax benefits should be a secondary consideration. SuperannuationSuper is a tax-effective investment and one of the best ways to save for retirement. This is because the government provides tax incentives to save through super. These include:
See Tax and super for more information. Insurance bondsInsurance bonds are investments offered by insurance companies. They can be tax effective if you're planning to invest for 10 years and follow certain rules. All earnings in an investment bond are taxed at the corporate tax rate of 30%. If no withdrawals are made in the first 10 years, no further tax is payable. They can be tax effective for investors with a marginal tax rate higher than 30%. Beware tax-driven investments Tax-driven schemes offer tax deductions now for investing in assets that may provide income in the future. These schemes can be high risk and some are scams. Check the ATO page investigate before you invest for how to spot a dodgy tax scheme. Or get professional advice from an accountant. Investing and your tax returnKeeping good records will help you at tax time to:
It will also help you calculate any capital gains or losses when you sell an investment. For all investments such as shares, property and cryptocurrencies you need to keep records to show:
You'll need to keep records for five years after you included the income and capital gain or loss in your tax return. How much interest income is taxable?In most cases, your tax rate on earned interest income is the same rate as the rest of your income. So if your normal tax bracket is 25 percent, you'll also pay 25 percent of interest in taxes.
How are you taxed on interest?Interest taxed as ordinary income
Typically, most interest is taxed at the same federal tax rate as your earned income, including: Interest on deposit accounts, such as checking and savings accounts.
How do you calculate taxable interest income?Where Do You Find Taxable Interest on Your W2? Taxable interest appears on Form 1099-INT. Box 1 of the form has all the interest income earned from the issuer. If there is something in Box 3, this figure only applies to interest inputted on your federal tax return.
How much is taxable income in Malaysia?2020 income tax rates for residents. |