Are you ready to sell shares but you are unsure of how much tax you will need to pay? The amount of capital gains tax (CGT) is affected by the length of time you’ve held shares and whether or not you’ve had a loss or gain. It also takes into account how much you originally paid for the shares.
This article refers to individuals who bought shares as a passive investment, not active traders. Different tax calculations apply for individuals or businesses who trade shares on a large scale.
Every single time you sell shares or give shares away, it is important to calculate the CGT to calculate whether you’ve made a loss or profited.
In the most basic terms, a loss is calculated where the costs of your shares have outweighed the incoming money, and a gain is where you’ve made a profit that exceeds the initial cost. Please note: If you are gifting shares, your CGT is calculated based on the full price of your shares.
To give you more of any idea of how tax is calculated when selling your shares, we’re outlining the rudimentary essentials you should know about CGT. Your entire capital gains for all your assets during the financial year are totalled and then minused by your capital losses. So, we’re not just calculating the cost of shares here.
If the final net figure is a gain, you would need to declare this total in your tax return which is taxed at your marginal tax rate. While you are unable to offset a net capital loss against your regular wages or any stream of income from investment properties, it can be carried over to the next financial year and used to offset future CGT.
When calculating the amount of CGT, individual taxpayers are entitled to apply the 12-month discount method. The discount applies to individuals, trusts, superannuation funds and self-managed super funds. Individuals and trusts are entitled to a 50% reduction in CGT if their shares have been held for a minimum of 12 months, while super funds and self-managed funds are reduced by 33.3%.
Let’s simplify this for you by using an example.
Brittany bought shares on 9 March. The 12-month period begins 10 March (the day after she bought the asset) and finishes 365 days later.
If Brittany sells her shares before 9 March the following year, she is not entitled to the discount or use indexation because she hasn't owned the share for at least 12 months.
If Brittany purchased the shares prior to 21 September 1999, she could choose to apply an indexation factor to increase the cost base instead of applying the 50% discount.
A qualified tax agent will be able to assist you in selecting the option which provides you the best end result.
The cost base of your shares is determined by what you originally paid for the shares and any ancillary costs, such as brokerage fees. It’s important to take into consideration exceptions to the rule, such as dividends that have been used to purchase extra shares. The cost of those dividends will be calculated in the shares’ cost base.
If the shares have been gifted to you, the cost base is considered to be the market value on the date you were given them. The exception to the rule is if you were a beneficiary and inherited the shares as part of a deceased estate. If the deceased person obtained the share prior to 20 September 1985, the cost base is determined by the market value on the day the person died.
Whether you need help investing in shares or calculating the cost base or capital gains or losses, contact our investment experts to help you achieve the best outcomes for your tax return.