Have you bought or sold shares in the current financial year? Here’s what you need to know about your tax position.
Disposing of your shares
When you dispose of shares, assuming you are an investor, and not a trader (see below), you will normally have to pay capital gains tax (CGT) on any profits.
Typically, CGT arises when you sell shares but can also happen if you give them away or you stop being an Australian resident. CGT taxes any increase in value from the time the share was acquired.
Your capital gain for a share is worked out like this:
- Deduct the cost base from the sale proceeds. The cost base is the price you paid for the share, plus incidental costs.
- Next, take away any capital losses.
- Then, discount the gain if you’re eligible. Individuals are entitled to a 50% discount. The asset must have been held for 12 months or more for the discount to be available.
- The resulting figure is your net capital gain. This is subject to tax at your marginal income tax rate.
TIP: Any shares acquired before September 20, 1985, are not subject to CGT.
Sometimes the proceeds and cost base of the share are not what was actually paid and/or received, but rather, the market value of the asset. This is typically to prevent people from minimising their tax by, say, selling the share to a relative for a low price.
What happens if you make a loss?
If your sale proceeds are less than your cost base, you will make a capital loss. These losses can be offset against capital gains arising in the same year and to the extent they are not used up, they can be carried forward indefinitely until capital gains arise to absorb them. Capital losses can only be offset against capital gains. They can’t be offset against any other form of income.
TIP: If you dispose of an asset during the year for a capital gain, you might want to consider disposing of any other assets you own which are sitting at a loss. That way, the capital loss can be offset against the capital gain. This is a popular year-end strategy with share investors.
Be careful though, if you sell loss-making shares to crystallise a capital gain just before the end of the tax year and then buy the shares back again at the start of the new tax year. The ATO generally regards this as an artificial contrivance or deliberate tactic to generate capital losses.
Are you a share trader?
If you dabble regularly in buying and selling shares, you could be deemed a share trader, rather than a share investor. If that’s the case, the tax you pay could look very different.
A share trader is someone who buys and sells shares purely for short term profits. Signs that you’re a trader include:
- Lots of transactions;
- A clear profit-making intent;
- You run your activities in a business-like manner (eg, a large investment of capital, a well-developed business plan, extensive research and properly; and maintained books and records).
Someone who buys and sells shares as part of a business will treat those shares as trading stock, and gains or losses on them will be taxed as ordinary income (effectively as business profits) rather than capital gains.
The key tax advantage for a trader is that losses can potentially be offset against other income (subject to certain anti-avoidance provisions).
What to do now before EOFY
Now is a good time to work out if you have a net capital gain from shares you’ve already sold. If so, you should be looking through your portfolio for stocks with losses that you could sell to offset paying tax on the gains.
Make sure that you have the necessary information about all your share sales so you can report this to the ATO. You’ll need details of the original purchase cost, the sales proceeds, the dates of acquisition and sale and any associated costs (eg, brokerage fees).
Remember that tax on shares is complicated and to avoid ATO penalties and possible audit, it pays to have a good tax accountant like H&R Block (NYSE:HRB) to make sure you report your share transactions accurately and fully.
Mark Chapman is the director of tax communications at H&R Block (NYSE:HRB). As well as operating his own private practice, Mark spent seven years as a senior director with the Australian Taxation Office. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales.