Did you know that when you sell your shares, the size of your capital gains tax (CGT) 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 your trades effectively.
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 (where the proceeds you receive exceed the cost base) or capital loss (where the cost base exceeds the proceeds). You also trigger a CGT event if you give the shares away and you're deemed to have disposed of them at their full market value on the date of the gift.
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 of 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 tax rate. If you have a "net capital loss", you can't offset this against ordinary income like salary or rental income. Instead, it can be carried forward to apply against future capital gains.
The 12-month discount rule
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 super funds, including SMSFs (33.3%), but not companies.
It's applied after you subtract any capital losses for the year and any carried forward from earlier years. Importantly, you can choose which gains to offset losses against, to give you the best tax outcome.
Working out the "cost base"
Where you bought the shares at market value, your cost base includes what you paid for the shares and also incidental costs like brokerage fees. If you reinvest dividends as additional shares, the amount of reinvested dividends is included in those shares' cost base.
What if you inherited shares from a deceased estate? If the deceased acquired the shares before 20 September 1985, you must adopt the market value on the date of death. But if the deceased acquired them after that date, you inherit the deceased's own cost base for the shares as at the date of death.
Contact our office for expert advice on managing your share portfolio to achieve the most tax-effective investment returns.