# How to apply capital gains tax discount



## skc (19 March 2013)

A question for the forum on capital gains tax discount for shares held >1 year.

Suppose I sold 2 share holdings in a financial year. These are:

Stock AAA, held for 2 years, profit = $1000.

Stock BBB, held for 2 years, loss = $200.

What is my total capital gains after discount?

Is it... 

$1000/2 - $200 = $300

Or

($1000 - $200)/2 = $400

That is, do I sum all CGT events for holding >1 year before applying the discount? 

Thanks

EDIT: I only needed 2 holdings in the example...


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## burglar (19 March 2013)

skc said:


> ...That is, do I sum all CGT events for holding >1 year before applying the discount? ...




I discount each event and sum, I believe that is one correct way.
But there is a second more complex discounting system which I could never understand.
I couldn't see a circumstance under which it was significantly different!!


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## So_Cynical (19 March 2013)

skc said:


> A question for the forum on capital gains tax discount for shares held >1 year.
> 
> Suppose I sold 2 share holdings in a financial year. These are:
> 
> ...




$1000/2 - $200 = $300 pretty sure that's how ive been doing it, the loss comes off after the 50% discount.


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## Klogg (19 March 2013)

If you go to page 12, step 18 in this doc:
http://www.ato.gov.au/content/downloads/IND00270252n41520611.pdf

I believe it answers it in a round about way.

Step 8 says to deduct any capital losses from any capital gains. THEN, you apply the CGT concession you get for holding > 12months.

That being said, the tax office do allow you to apply the losses in the best way you see fit:



> DEDUCTING YOUR LOSSES
> You will probably get the greatest benefit if you deduct
> capital losses from capital gains in the following order:
> 1 capital gains for which neither the indexation method
> ...




Therefore, if you have a portion of CGT that cannot have the concession apply, apply your capital losses against that first (as the document suggests).

Hope this helps


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## Klogg (19 March 2013)

burglar said:


> I discount each event and sum, I believe that is one correct way.




Actually, this is against what the tax office advise, but unless you're talking big CGT concessions, they won't pick it up.

But there can be big differences in taxes if you discount each event then sum, rather than the other way around.


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## So_Cynical (19 March 2013)

Klogg said:


> If you go to page 12, step 18 in this doc:
> http://www.ato.gov.au/content/downloads/IND00270252n41520611.pdf
> 
> I believe it answers it in a round about way.
> ...




Step 8 says to deduct any capital losses from any capital gains. THEN, you apply the CGT concession you get for holding > 12months.

Well there you go..i love self assessment!


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## burglar (20 March 2013)

Klogg said:


> Actually, this is against what the tax office advise, but unless you're talking big CGT concessions, they won't pick it up.
> 
> But there can be big differences in taxes if you discount each event then sum, rather than the other way around.




No!


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## skc (20 March 2013)

Klogg said:


> If you go to page 12, step 18 in this doc:
> http://www.ato.gov.au/content/downloads/IND00270252n41520611.pdf
> 
> I believe it answers it in a round about way.
> ...




Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting. Following the steps and the worked example you would arrived at $400 of capital gains. Following the advice from the box you arrive at $300 instead.

I am going to use the number that gives me the greatest benefit, as stipulated in the document.


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## burglar (20 March 2013)

skc said:


> Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting. Following the steps and the worked example you would arrived at $400 of capital gains. Following the advice from the box you arrive at $300 instead.
> 
> I am going to use the number that gives me the greatest benefit, as stipulated in the document.




Agree with you. 
I have in the past, rang the Tax Office to clarify. 
I no longer have proof.

A note of caution: the tax man is the only person who can put you in gaol without a trial.


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## craft (20 March 2013)

skc said:


> ($1000 - $200)/2 = $400




It’s definitely this way.

Sum all CGT events.

Discountable, No discountable,  Losses.

Discount allowable is the lesser of 50% of discountable Capital Gains and 50% of summed CGT events.

If you have Non-discountable gains larger then losses you will avoid losing any discount.


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## burglar (20 March 2013)

craft said:


> It’s definitely this way.
> 
> Sum all CGT events.
> 
> ...




@craft and Klogg 
You win!
I am now confused.


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## Klogg (20 March 2013)

skc said:


> Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting.




No probs.

Yeah, some of the ATO documentation is terrible. If you want a really painful read, check out the document on Personal Services Income... Took me a while to get my head around that crap!


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## Klogg (20 March 2013)

burglar said:


> @craft and Klogg
> You win!
> I am now confused.




I'll give you an example:

Imagine you have three CGT events:
(1) $600 Capital gain that is not eligible for the CGT discount (held < 12months)
(2) $1400 Capital gain that IS eligible for the CGT discount (held > 12months)
(3) $800 Capital loss

So, according to the ATO document, you can subtract (3) from (1), which allows you to do the following:

Capital gains taxable amount = (1) - (3) + amount from (2)
= 600 - 800 + amount from (2)
= -200 + amount from (2)

As there's  still a loss here, you have to apply the loss BEFORE applying the CGT discount. Therefore:

Taxable amount = (-200 + 1400)/2
= 600


In simple terms, you have to apply the loss against any of your capital gains until they've all been included, and then you can apply your CGT concessions, should you have any CGT events that warrant it after having losses applied against them.

Hope this makes sense


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## burglar (20 March 2013)

Klogg said:


> ... Hope this makes sense




Given the gobbledeegook written by the ATO; I see that you are correct!
It means that Losses and Accumulated Losses are negatively discounted! Right?!


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## drsmith (20 March 2013)

Klogg said:


> Hope this makes sense



It makes sense to me. Step 9 came after step 8 when I went to school.


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## craft (20 March 2013)

skc said:


> Lol. Thanks for the link. Who wrote this $hit. The information is self-conflicting. Following the steps and the worked example you would arrived at $400 of capital gains. Following the advice from the box you arrive at $300 instead.
> 
> I am going to use the number that gives me the greatest benefit, as stipulated in the document.




I had a quick look and couldn’t see the contradiction.

The principle that losses are allocated first is clear.

You can apply losses however you like to get the best result. But you can’t take the discount first and then apply losses.

Get it wrong and get audited (even if it is small fry you could get picked up in a random audit) you will have to then pay the correct tax plus interest and I would bet for this sort of breach (they wouldn’t accept your reliance on their documentation, because you are simply misinterpreting it) a penalty as well - Not to mention the scrutiny all your other year tax returns would then come under.

This is all surely moot though for all profitable short term traders – you would have enough non-discountable gains each year to offset losses – right.


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## drsmith (20 March 2013)

craft said:


> Get it wrong and get audited (even if it is small fry you could get picked up in a random audit) you will have to then pay the correct tax plus interest and I would bet for this sort of breach (they wouldn’t accept your reliance on their documentation, because you are simply misinterpreting it) a penalty as well - Not to mention the scrutiny all your other year tax returns would then come under.



Indeed.

Anyone wanting to test the alternative would want to ensure they were on very firm legal ground.


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## Ves (20 March 2013)

+1 to Craft and Klogg.


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## skc (20 March 2013)

craft said:


> I had a quick look and couldn’t see the contradiction.
> 
> The principle that losses are allocated first is clear.
> 
> ...




After reading the document again I agree with you. In fact, example 16 at the back is the most relevant and there's no mis-interpretation that discount is applied after offseting the loss.

Short term gains for a trader are income rather than in the capital account... so there's usually not a lot of short term capital gains to offset the loss.


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## Ves (20 March 2013)

skc said:


> Short term gains for a trader are income rather than in the capital account... so there's usually not a lot of short term capital gains to offset the loss.



My understanding is that an SMSF is an exception to the rule... you cannot have trading stock since 10 May 2011, it's all on capital account. Just a FYI for those still trying to apply trading losses to other SMSF income.


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## craft (20 March 2013)

skc said:


> After reading the document again I agree with you. In fact, example 16 at the back is the most relevant and there's no mis-interpretation that discount is applied after offseting the loss.
> 
> Short term gains for a trader are income rather than in the capital account... so there's usually not a lot of short term capital gains to offset the loss.




That's a bit of a pain then - balancing up the losses against non-discountable gains is the legit minimisation route. Any scope for segregating business and private to generate some non-discountable gains on a capital account? Perhaps too messy to be worth it.


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## burglar (20 March 2013)

craft said:


> That's a bit of a pain then - balancing up the losses against non-discountable gains is the legit minimisation route. Any scope for segregating business and private to generate some non-discountable gains on a capital account? Perhaps too messy to be worth it.




The ATO is suitably vague about who is a trader and who is an investor!


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## skc (20 March 2013)

craft said:


> That's a bit of a pain then - balancing up the losses against non-discountable gains is the legit minimisation route. Any scope for segregating business and private to generate some non-discountable gains on a capital account? Perhaps too messy to be worth it.




It's not that much of a pain as I don't really have much capital loss. Most of my loss are trading losses and just the cost of doing business. It's a bit hard to argue I am not a trader when clearly I am. For "investments" I always make a separate note on why I am investing... hopefully that'd suffice in an audit.

BTW I usually just hand the gains and losses to my accountant who deals with the tax return... it's just cross my mind the other day wondering the method to which they calculate the tax... 

So thanks everyone for the discussion (and saving me some fees from my accountant).


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## craft (20 March 2013)

skc said:


> It's not that much of a pain as I don't really have much capital loss. Most of my loss are trading losses and just the cost of doing business. It's a bit hard to argue I am not a trader when clearly I am. For "investments" I always make a separate note on why I am investing... hopefully that'd suffice in an audit.
> 
> BTW I usually just hand the gains and losses to my accountant who deals with the tax return... it's just cross my mind the other day wondering the method to which they calculate the tax...
> 
> So thanks everyone for the discussion (and saving me some fees from my accountant).




Knowing the way it’s calculated, A few suitably documented investments and some also suitable documented _(strategic)_ short term changing of the mind and you can hand the accountant exactly what’s needed to avoid wasting the discount.  Nothing to see here - lifes good


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## jnalad (29 September 2013)

Capital Gains Tax is not easy to maintain when you have to deal with mutiple trades and distributions, long term gains, short term gains and losses plus distributions with CGT components including tax free and tax deferred. Are you doing it correctly. Plus if you not sure what to do then use a software that does it for you. I use www.unip.com.au and I am happy with it. You wont be disappointed.


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## burglar (29 September 2013)

jnalad said:


> Capital Gains Tax is not easy to maintain when you have to deal with mutiple trades and distributions, long term gains, short term gains and losses plus distributions with CGT components including tax free and tax deferred. Are you doing it correctly. Plus if you not sure what to do then use a software that does it for you. I use www.unip.com.au and I am happy with it. You wont be disappointed.




I'm told it's not rocket science, but Capital Gains Tax does have nuances!



I try to keep mine simple!


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## Smurf1976 (25 October 2013)

So if I have understood this correctly, then (keeping the figures small to make this simple):

Suppose that I had a loss of $1000 carried over from the previous year.

In the current financial year I then sell two parcels of shares, both of which have been held for more than 12 months. One results in a profit of $200, the other results in a profit of $900.

However, since losses must be applied prior to applying any CGT discount, the end result is (1000 - 200 - 900) = a $100 profit to which the 50% GCT discount can then be applied.

I've kept the figures simple, but have I understood the principle correctly here?


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## qldfrog (25 October 2013)

Smurf1976 said:


> So if I have understood this correctly, then (keeping the figures small to make this simple):
> 
> Suppose that I had a loss of $1000 carried over from the previous year.
> 
> ...



that is indeed my understanding and the way I handle it in my tax return but I am not a professional in this matter


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## burglar (25 October 2013)

Smurf1976 said:


> So if I have understood this correctly, then (keeping the figures small to make this simple):
> 
> Suppose that I had a loss of $1000 carried over from the previous year.
> 
> ...




Tax Office website shows several examples.

Only one example _clearly_ shows this to be the case.


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