From Pearler: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax advisor, and don't have any information about your personal situation. When investing, there may be tax implications and you should get advice from a licensed tax adviser .
As you begin your wealth journey, it's easy to get caught up in the thrill of investing in exchange-traded funds (ETFs) and shares. But long term investing in the share market is not entirely a “buy and forget” move. One of the most challenging aspects is actually staying on top of the investing admin tasks. If not done efficiently, the numbers and paperwork can quickly become a headache for many investors.
From managing your share registry to keeping track of your dividends and capital gains, there's a lot to juggle. Failing to stay on top of these tasks can lead to missed payments, inaccurate records, and even tax troubles.
In this episode, we’ve put together the essentials of investing admin checklist to help you avoid the frustrations. We share information and actionable insights on how to have smoother investing experience long after placing the buy order. Below are some of the key takeaways from the full episode.
How do shares actually make money?
Shares often have two sides of investment returns. You can make money through capital growth and dividend income.
Dividends
When you invest in a company's shares, you're essentially buying a tiny piece of that company. As a shareholder, you're entitled to a share of the company's profits.
Think of dividends like rent. You collect rent from your tenants as a way of earning income from your property. Similarly, if you own shares in a company, you collect dividends as a way of earning from your investment.
Capital growth
Capital growth (or capital gain) is the increase in the price of the share or property or other investment. For shares, this can happen as the company grows and becomes more valuable. For a house, capital growth can happen as the value of the property increases over time.
To put it in perspective, let's say you bought a share for $10 and it grew in value to $11 ( NOTE: these numbers are purely hypothetical for the sake of this example ). This would be a capital gain of $1. On top of this, the share might pay out a 5% dividend, which would be 55 cents. So in total, you would receive 55 cents from the dividend and $1 from the capital gain.
Investing admin checklist: what to do after you’ve invested
You've done the hard part - setting aside money and choosing where to invest it. But there are a few more things to do that come with being a shareholder.
1.Share registry: what is it and how to use it? When you buy shares, you become a shareholder in that company. The company then keeps a record of its shareholders in a share registry. It's like a database that keeps track of who owns what. You can use the share registry to make sure your personal information is accurate and up-to-date.
- Action: is everything in order?
To view the share registry, you can go on the company's website or contact the share registry provider directly. Make sure that all your ETFs are there and that your personal information is accurate. Add your tax file number (TFN) and bank details if you haven't already done so. This is to make sure that you receive your dividends and other payments on time.
2. Dividend Reinvestment Plan (DRP) : overview and how to sign up
This is a program some companies offer that lets you automatically reinvest dividends in the company's shares. You can potentially earn more money in the long run when you buy more shares through dividends. But, the downside is that you have to pay tax on the dividends even if you're not getting any cash. (READ: The Ultimate Guide to Dividends for Australians )
- Action: setting up a DRP
To set up a DRP, you'll need to log in to your share registry and follow the prompts. Make sure you read and understand the terms and conditions before you sign up. You can choose to reinvest all or part of your dividends.
3. Tracking your investments: capital gains and dividends
Once you've set up a DRP, you'll need to keep track of what you've bought and when. This includes as well any capital gains or dividends that you've received. We’ll explain why this is important in a second.
- Action: choose your tracking tool
There are various tools available for this, including Sharesight and spreadsheets. When you listen to the full episode, we weigh on these two options based on our personal experience.
4.And don’t forget tax time
When you’re investing, doing your own taxes can be a little dizzying and frustrating. That’s why keeping good records of your investment transactions can help you prepare for tax time a lot easier.
- Action: doing tax as an investor
You'll need to keep records of your purchases and sales, as well as your dividends. You'll also need to calculate your capital gains and losses when you sell your shares. We suggest seeking the help of a tax professional if you're not sure how to do this.
How to manage your share register
Have you recently purchased ETFs and received a letter in the mail instructing you to create an account on a share registry website?
In episode 4 of our podcast, we talked about what share registries are, but here's what you actually need to do.
1.Visit the website of the share registry mentioned in your letter and create an account. Then you can instruct them on how to treat your dividends and other actions such as voting.
2.For CHESS-sponsored brokers like Pearler , the share registry is the official record keeper of your shares and ETFs. This is how they keep track of who owns what, so it's important to keep your details up to date.
3. In the case of brokers like Pearler, they don't manage your share registry for you. It's up to you to actively create an account and manage it yourself. Keep your TFN and bank details up to date for each holding so you don't miss out on dividends.
4.In Australia, there are three main share registry companies: Computershare, Link Market Services, and BoardRoom. We highly recommend reading the share letters they send you. These documents ensure there’s transparency and accountability in the ownership of shares.
5.Make sure to set up two-factor authentication for your share registry account. If you get hacked, you could lose thousands of dollars. It can be a long process to rectify the situation, so it's better to take precautions. Remember: your share registry is the gateway to all of your investments.
Do we automatically reinvest our dividends?
This is a question that many investors grapple with, including ourselves. We have our own personal stories and reasons why we choose (or not) to reinvest our dividends.
As diverse as they come, investors look at it as a matter of choosing an investing strategy. They also align their decision with their money goals and the level of personal control they want to have.
We walk you through the pros and cons in the episode linked above, but here’s a quick overview:
Advantages
- No brokerage fees: Automatically reinvesting your dividends can save you a lot of money on brokerage fees.
- Dollar-cost averaging (DCA) : You're taking the emotion out of investing when you buy the same amount of shares at regular intervals.
- Possible discount for reinvesting through DRP: Some companies offer a discount for reinvesting dividends through a dividend reinvestment plan.
- Can simplify investing: If you set up automatic dividend reinvestment, you can "set and forget" your investments.
- No minimum number of shares: Unlike some brokers who have a minimum of $500, there's no least number of shares required to participate in a DRP.
Disadvantages
- No control over price or time: You could be buying shares when they're expensive.
- Unbalanced portfolio: Reinvesting dividends could lead to an unbalanced portfolio and reduced diversification if you're buying the same shares over and over again.
- No income stream: If you reinvest your dividends, you won't receive any income from your investments.
- Tax implications: You have to pay tax on dividends whether or not they are reinvested, so you'll need to put extra cash aside to pay for this.
- Complicated CGT computation: Automatic dividend reinvestment can make working out capital gains tax (CGT) a lot more complicated.
- Small holdings: If the share price is high and you can't buy a full share, the share registry will hold the money until there’s enough to make the purchase.
How are dividends taxed?
Dividends are taxed as income, just like your salary or wages. You'll need to pay tax on any dividends you receive, regardless of whether you choose to reinvest them or not.
The amount of tax you'll pay on your dividends depends on your marginal tax rate, which depends on your total income. To find out about your marginal tax rate, you can go on the Australian Taxation Office (ATO) website or speak to a qualified tax professional.
What are franking credits?
Franking credits are tax credits that are attached to dividends coming from Australian companies. These credits represent what the company has already paid on its profits before distributing them as dividends.
Here's where it gets interesting. Shareholders can use these franking credits to offset the amount of tax they owe on dividends. If the credits are worth more than your marginal tax rate, you can receive a refund for the difference.
The company tax rate in Australia is 30%. If your personal tax rate is also 30%, your dividends are pretty much tax-free since the company tax rate already covers it. But, if your personal tax rate is 45%, you’ll have to pay the 15% after deducting the company tax rate. For a comprehensive view of the tax scenarios, read our complete guide on franking credits here.
If you're curious about which shares or ETFs have franking credits attached to them, it's easy to find out. Simply Google the ETF and the word "distribution" or "dividends". (For example: "A200 distributions" or "VAS dividends")
The ASX website is also a great resource for finding this information. However, note that franking credits are unique to Australian companies. So ETFs with purely US exposure, for example, will not have them.
If you qualify for franking credits, you can use Pearler's calculator to find out easily how much credits you can claim.
W-8BEN: What is it and when to use it?
Are you looking to expand your portfolio beyond the Australian stock market? If that’s a yes, there's something important you need to know: the W-8BEN form.
When you invest in international shares, you might have to pay a Withholding Tax. This tax— typically around 30% — is taken out of any dividends you earn from your investments. But there's good news: you can potentially access a reduced withholding tax rate when you submit a W-8BEN form.
There are two situations where Australian investors might need to submit this form.
- The first is if you're trading US-domiciled Australian stocks (such as VTS, which is on the ASX). You can file the W-8BEN via the responsible share registry.
- The second situation is if you're trading US stocks (like AAPL or GOOGL, which are on the NASDAQ). Pearler’s US brokerage partner automatically fills and files this form for you when you register for a US Trading account.
But if all of this sounds too complicated, don't worry! You can alternatively buy Australian domiciled ETFs that have international exposure, such as VGS, VISM, and VGE.
Tracking your portfolio
Brokers are great for buying and selling shares, but they often don't give you a complete picture of your investing journey. That's why it's a good idea to track your investments elsewhere.
You can use tools like Sharesight, Navexa, or even Google Sheets. These tools allow you to keep a close eye on your transactions. You can also track your total returns, which includes capital gains, dividends, and even currency gains. Incidentally, these numbers come in handy when tax season arrives.
For example, if the share price is down, you may still be in the green overall because of your dividends. This is something that many new investors forget to consider. Currency can also have a big impact, so keep this in mind when investing in overseas companies.
If Sharesight or Navexa doesn’t work for you, you can also download tax reports directly from the share registry. And if you’re still feeling overwhelmed, don’t hesitate to reach out to an accountant for help.
Actionable takeaways from the episode
For this week, we recommend checking your share letters and share registry account to make sure everything’s there. If you haven’t already, update your banking information and TFN for each holding too. And you know the drill — give a listen to the full episode for a full insights on managing your investing admin.
Happy investing!
