Navigating the world of tax may feel overwhelming, but understanding the fundamentals doesn't have to be a chore – especially when it comes to capital gains tax (CGT). For example, when selling shares you could be eligible for the CGT discount, which in turn could reduce the amount of CGT you might be required to pay. Here, we break it down.
Importantly, this article is only relevant to you if you’re holding your shares on capital account – for example, if you’re a share trader then this article might not be applicable to you because any profits you make from your share trading activity might be treated as ordinary income and the CGT discount would not apply. If you’re not sure, we suggest you seek independent taxation and financial advice.
What is CGT and when does it apply?
In simple terms, shares, property or other assets you own are generally subject to the CGT rules. While it’s commonly known as CGT, or ‘capital gains tax’, it forms part of your income tax liability and does not exist as a separate tax. This means the net capital gains you make in an income year are included in your assessable income and subject to tax at your personal marginal rate.
Usually, capital gains tax is payable on a net capital gain, with the net capital gain calculated as follows:
- Your total capital gains,
- Less any capital losses,
- Less any discount you are entitled to on your gains.
Note, assets you acquired before 20 September 1985 are usually exempt from CGT.
In general, to figure out your capital gain from a transaction, subtract the asset's tax cost base (generally the amount you initially paid for it plus any costs incurred to acquire, hold, and dispose of the asset) from the sale price.
It’s also possible to make a capital loss if you sell the shares for less than the tax cost base. Capital losses can be used against capital gains in the same year or carried forward and used against capital gains made in a future year.
The CGT discount
One of the features about our CGT system is the availability of CGT concessions, such as the 50 per cent CGT discount available to Australian resident individuals and Australian resident trusts for assets held for 12 months or more. If applicable, the CGT discount reduces the net capital gain included in your assessable income. Refer to the example below about how it could be applied.
Example – working out CGT
You are an Australian tax resident, who holds shares on capital account for more than 12 months. You bought 1,000 shares at $10 each for a total of $10,000 and paid $1,000 in transaction costs. You sell the shares for $20,000 without brokerage costs. You have $2,000 in capital losses carried forward from prior years. You did not enter into any other transactions.
To work out your net capital gain or loss for the year:
Step 1 |
Calculate the capital gain from disposal, being the sale price less purchase price and transaction costs
|
$20,000 – ($10,000 + $1,000) = $9,000
|
Step 2 |
Apply capital losses to get your current year capital gain |
$9,000 - $2,000 = $7,000 |
Step 3 |
As you’re an Australian tax resident and have held the shares for more than 12 months, use the 50 per cent CGT discount to reduce your current year capital gain |
$7,000 x 50% = $3,500 |
Net capital gain for the year (this amount is then taxed at your marginal tax rate plus Medicare Levy) |
$3,500 |
How to show this on your tax return
Your capital gains should be disclosed to the ATO in your supplementary tax return. Continuing with the example above, you would record your net capital gain of $3,500 and the pre-discounted gain of $7,000 in your return (this is usually at Item 18 of the supplementary return, at labels A and H respectively). This assumes the shares are held on capital account.
Things to remember when cracking the CGT code
- Do the CGT rules even apply: Think carefully whether you hold your shares on capital account or not as the capital gains tax discount is only relevant to shares held on capital account. If you’re not sure, we suggest seeking independent taxation and financial advice.
- Keep track of everything: File all records of purchase prices, sale prices, any incidental and other costs that may impact the cost base. A little extra attention-to-detail throughout the year will make your tax return far less stressful to sort out and (most importantly) ensures you don’t miss any relevant expenses.
- Consider whether the CGT discount might be available:The timing of your share sales could potentially impact the CGT discount available.
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Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
Commonwealth Securities Limited (CommSec) is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 (Cth) and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law. For the latest information, check the ATO website or speak to your accountant or financial advisor.
Past performance is not a reliable indication of future performance.