Did you know when you sell your shares, the size of your capital gains tax bill is affected by how long you’ve held the shares, and how you offset your capital gains and losses? Knowing the tax rules can help you plan ahead.
Whether you own just a few listed shares or have an extensive portfolio, understanding how capital gains tax (CGT) applies when you sell your shares can help you plan your trades effectively. If you trade shares on a scale that amounts to a business of share trading, talk to your adviser about the different tax regime that applies.
Each time you sell a parcel of shares, you trigger a “CGT event” and you must work out whether you’ve made a capital gain on that parcel or capital loss. You also trigger a CGT event if you give the shares away as a gift. For tax purposes, you’re deemed to have disposed of the shares at their full market value.
Here’s how the CGT rules work: all of your capital gains for the income year are tallied and reduced by any capital losses. This includes your gains and losses from all your assets that year, not just shares.
If you have an overall “net capital gain”, this is included in your assessable income and taxed at your marginal rate. If you have a “net capital loss”, you can’t offset this against ordinary income like salary or rental income. Instead, a net capital loss can be carried forward to future years to apply against future capital gains.
As an individual, you can reduce your capital gain by 50% if you’ve held the shares for at least 12 months. This “discount” is also available to trusts (also 50%) and superannuation funds, including SMSFs (33.3%), but not companies. This is an important consideration when you’re deciding what structure to hold investments in.
When you bought the shares at market value, your cost base includes what you paid for the shares and also incidental costs like brokerage fees. Watch out for special situations like dividends you chose to reinvest as additional shares – the amount of reinvested dividends is included in those shares’ cost base.
The information contained on this website and in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Taxation, legal and other matters referred to on this website and in this article are of a general nature only and are based on our interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
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