60 second guide: Capital Gains Tax on Shares
A little bit of planning can go a long way to minimising your capital gains tax (CGT) bill. Read on to find out tips and traps that may help you minimise the tax you have to pay.
A capital gain or loss is the difference between what it cost you to buy a parcel of shares and what you received when you sold them. If you make a gain, this amount is added to your income and is then subject to your marginal rate of tax.
Do you have any capital losses?
If you make a capital loss, you cannot claim it against income but you can use it to reduce a capital gain in the same income year.
If your capital losses exceed your capital gains or you make a capital loss in an income year and you don’t have a capital gain, you can carry the loss forward indefinitely and deduct it against capital gains in future years. Before your capital gain is added to your income it can be reduced by capital losses you have made in the current or past financial years.
Choosing the best CGT method
There are three ways to work out your capital gain. You can choose the method that gives you the best result, i.e. the method that gives you the smallest capital gain.
Although two of the methods reduce the amount of your capital gain, you need to have owned the shares for at least 12 months before you sell them.
If you sell shares that you have owned for less than 12 months the full capital gain will be assessable for income tax purposes.
For more information on working out your CGT click here to view the Australian Taxation Office (AT0) guide to the three calculation methods.
Timing can be important
Since 19 September 1999, if you purchase shares and subsequently sell or transfer ownership after holding them for more than 12 months you are entitled to a 50% discount.
Ken earns $85,000 per year as a landscape gardener. He buys 3,000 shares for $2.00, valued at $6,000 with brokerage paid separately on 15 July 2012. The shares are trading at $4.00 throughout July 2013. If he sells his shares for $4.00 on 14 July 2013, his assessable capital gain will be $6,000, i.e. $3,000 x $4.00 = $12,000 less what he paid for them which was $6,000.
If Ken held the shares for an extra two days and sold them on 16 July 2013 his assessable capital gain would be $3,000 as he is entitled to the 50% CGT discount. This is because he held the shares for more than 12 months.
Assuming he had no other capital losses or deductions, holding his shares for longer than 12 months, has earned Ken a tax saving of $1,110.
Gather all the relevant information you will need
When lodging your tax return you will need the purchase and sale prices of shares you have sold in the previous financial year. This information can be found on your contract notes.
When lodging your tax return you will need the purchase and sale prices of shares you have sold in the previous financial year. This information can be found on your contract notes. Also, remember to keep any tax invoices for any deductible expenses.
If you participated in a dividend re-investment plan you will find the purchase price of each parcel of shares on your dividend statement. For more information on CGT click here to view the ATO guide. For more information on financial products please visit: www.mywealth.commbank.com.au or email [email protected] This article is to be read as a guide only and may not suit your individual circumstances.