# CGT: How does it work?



## Jay-684 (14 April 2005)

About to sell a few shares that I have held for some time, and made a considerable profit on. So I want to know how CGT is calculated - if the tax is your income tax rate or if its a set rate etc.

Any help would be appreciated

thanks

Jay


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## Oob (14 April 2005)

*Re: CGT - hows it work?*

CGT is taxed at your marginal tax rate. 

You may get a discount for shares held for more than one year as follows:
Individuals and trusts - 50%.
Superannuation funds - 33.33%.
Companies - 0%.


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## RichKid (14 April 2005)

*Re: CGT - hows it work?*



			
				Jay-684 said:
			
		

> About to sell a few shares that I have held for some time, and made a considerable profit on. So I want to know how CGT is calculated - if the tax is your income tax rate or if its a set rate etc.
> 
> Any help would be appreciated
> 
> ...




Jay,
Please search the forums using the search tool above, I'll be surprised if you don't find suitable replies or links to the relevant ATO pages. It is always good to do that first or we end up with a million threads on the same topic from more or less the same angle. See the 'similar threads' listing at the foot of each thread for related info too. Please be aware that you'll need a qualified tax adviser to get complete info, otherwise the ATO is the best bet. Tax isn't as simple as it should be unfortunately...Good luck!


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## dutchie (19 November 2006)

*Re: CGT - hows it work?*

I was wondering if anyone could confirm my understanding of cgt consequences in the following scenario;

2000 - buy a vacant block of land for $50,000
          (borrowed $40,000)
2006 - sell same vacant block of land for $100,000


Capital Gain = 100,000
Less...............60,000    (50,000 indexed up to current value)
Less...............10,000    (cost of holding property- interest on loan,rates etc)

CG.................30,000


Add 30,000 to current income which puts me in certain tax bracket and pay tax rate accordingly on that sum.


Cheers

Dutchie.


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## Prospector (19 November 2006)

*Re: CGT - hows it work?*

This is how it was explained to me so it might be relevant to you:

You have held the land for more than 12 months so.....

Buy at $50,000
Sell at $100,000

= $50,000 balance.

Less costs of acquiring it (stamp duty, conyevancing, etc etc) - lets say this is $2,000

Less costs of selling it (conveyancing, commissions etc etc) lets say this is $5,000

(for you, there are some costs, like interest, in holding the land but I'm not sure what to do with this but I suspect it will reduce your CG further)

= $43,000

Divide this by 50% because you have held it for over 12 months 
= $21,500

Add $21,500 on top of any other salary and that will put you in a particular tax bracket on which you pay your tax (plus medicare)

It gets way more complicated if there is a house involved but land is relatively easy.


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## dutchie (19 November 2006)

*Re: CGT - hows it work?*

G'day Prospector

I thought you only got the 50% discount if it was your home.


Cheers

Dutchie


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## swingstar (19 November 2006)

*Re: CGT - hows it work?*



			
				dutchie said:
			
		

> G'day Prospector
> 
> I thought you only got the 50% discount if it was your home.
> 
> ...




If it's your home you don't get taxed at all.


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## Prospector (19 November 2006)

*Re: CGT - hows it work?*



			
				dutchie said:
			
		

> G'day Prospector
> 
> I thought you only got the 50% discount if it was your home.
> 
> ...




Swingstar is right - no CG on selling your own home; the 50% discount was brought in to offset the CG measure that was taken away - the inflation offset measure.  Anything bought after 1999 (I think that was the year) has to use the 50% measure.  The 50% measure is way better anyway.

Wonder when they will bring in CG on your own home - now that would be a nightmare!


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## chansw (19 November 2006)

*Re: CGT - hows it work?*

Jay

I suggest you either pick up a copy of "Personal investors guide to capital gains tax 2006" which provides many different examples from ATO office or download from ATO web site.

http://www.ato.gov.au/individuals/content.asp?doc=/content/66272.htm

If you are going to do the tax return yourself, it is better to follow that guide. A few months ago, I asked a question about CGT on shares to a staff at the ATO office in Perth. To be safe, I called the ATO helpline number after that and got a different answer from another staff in different state. I ended up returning to the ATO office and asked the question again. One of the staff said it is always wise to follow the information in their publications. If something goes wrong, at least you have a leg to stand on. Just my 2 cents.


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## deftfear (19 November 2006)

*Re: CGT - hows it work?*



			
				dutchie said:
			
		

> I was wondering if anyone could confirm my understanding of cgt consequences in the following scenario;
> 
> 2000 - buy a vacant block of land for $50,000
> (borrowed $40,000)
> ...




Your cost base should be 50,000 plus the 10,000 cost for interest, rates etc (provided that you haven't claimed these in prior years which I doubt seeing it was a vacant block of land presumably not earning any income) plus any buying and selling expenses such as legal fees, stamp duty, real estate costs etc, say 10,000 as a rough guess.

That gives you an approximate cost base of 70,000 and a capital gain of 30,000 discounted 50% as you have held it for over 12 months giving you a total of 15,000 to be added to your taxable income. So say you earn 50,000 a year, your income will now be 65,000 including the capital gain.

I hope that helps, but please contact your accountant as this is just general advice and I cannot know all of the information related to your case. Take a look at the link chansw gave you as well, I'm sure that will help and spell things out a bit more for you.


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## dutchie (19 November 2006)

*Re: CGT - hows it work?*

Thanks everyone for your replies.

Will certainly speak to my accountant in the near future.

Cheers

Dutchie


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## Staybaker (20 November 2006)

*Re: CGT - hows it work?*

My understanding is that, strictly speaking, you can only claim interest costs as a deduction when a loan is used to purchase an _income-producing_ investment. Since a vacant block of land is probably not producing any income, a deduction for the interest expense may be disallowed.

However, I am not an expert and could be wrong.

Cheers, Staybaker.


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## deftfear (20 November 2006)

*Re: CGT - hows it work?*



			
				Staybaker said:
			
		

> My understanding is that, strictly speaking, you can only claim interest costs as a deduction when a loan is used to purchase an _income-producing_ investment. Since a vacant block of land is probably not producing any income, a deduction for the interest expense may be disallowed.
> 
> However, I am not an expert and could be wrong.
> 
> Cheers, Staybaker.




You are correct in that you can only claim a tax deduction for interest costs against an income producing asset in your annual tax return, ie you have a rental property you are renting out you can claim the interest costs against the rental income. However for a vacant block of land not producing rental income, you can accrue these costs and it can increase your cost base for capital gains purposes only, it cannot decrease your annual income.


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## Prospector (20 November 2006)

*Re: CGT - hows it work?*

When you purchase a block of land, and claim interest deductions each year, then you have to have purchased the block of land with the intention of making an income from it at some later stage (ie build on it then rent it out).  As long as you have the intention at time of purchase, my understanding is that you then claim the interest which will reduce your taxable income each year.

If you have claimed the interest costs each year on your tax return, then obviously you can't also add this to the cost base when you sell.


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## 123enen (20 November 2006)

*Re: CGT - hows it work?*

I strongly believe non of the interest costs for the land are deductible. Especially now that the land has been sold. 
It is not an income producing assett, irrelevant of intention.


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## Prospector (20 November 2006)

*Re: CGT - hows it work?*



			
				123enen said:
			
		

> I strongly believe non of the interest costs for the land are deductible. Especially now that the land has been sold.
> It is not an income producing assett, irrelevant of intention.




The intention is everything!  Check out this link - page 14, right hand column, second paragraph:

"If you take out a loan to purchase a block of land on which to build a rental property or......then the interest on the loan will be deductible from the time the loan is taken out...."

http://www.ato.gov.au/content/downloads/NAT1729-06.pdf


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## Fab (28 December 2006)

*Re: CGT - hows it work?*



			
				Prospector said:
			
		

> This is how it was explained to me so it might be relevant to you:
> 
> You have held the land for more than 12 months so.....
> 
> ...




Does that work the same way for a normal share transaction let's say I bought $100 000 worth of BHP (under my name) over 1 year ago sells them today at $150 000
Divide the proift : $50 000 by 50% because I have held it for over 12 months
= $25 000 

I would have to then add the $25 000 to my yearly income let's say $50 000 income for the year which would mean:

$50 000 income + $25 000 (Share profit) = $75 000 taxable income.

Please confirm this is how it works for taxation purpose as this reasonably important thing in share investment.
Also investing in the lower income earner name appears to be the best option    except if you do a lot of daily or less than 1 year share trading and then you would have to earn more than $75 000 (30% tax limit for 2006-2007) to make interesting to invest under a company name.


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## lianeisme (26 January 2010)

I have a question in regards to capital gains tax.
Example only If you start trading stock and  put $100,000 of borrowed funds in to the stock market say from a line of credit set up for investment only, on which you are paying interest. During the year you buy and sell stock and manage to build your stock portfolio to $200,000 in value. At the end of the financial year you are holding this profit in stock. Do you pay Capital gains tax as the profit is not yet realised because it is still in the market and rolling and not actual cash.

If this became your main source of income would you pay impute tax on the realised tax as a normal tax paying citizen or do you pay capital gains tax. 
If you do pay capital gains tax how do they calculated this, in regards to your book value or per trade profit.


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## Beej (26 January 2010)

This type of question has been covered a few times before. As a retail "investor" you would be liable for capital gains tax on the total NET capital gain of all the sales of shares that you made each financial year. Ie net capital gain = the profit + loss from all trades you made, after accounting for brokerage costs etc. (ie actually realised via sale of the shares). You can also claim the interest in your loan as a general tax deduction as the money was borrowed for income producing investment purposes.

If you are an active enough trader (main source of income etc as you suggest) then you could be classified as running a trading business, then it still works out pretty much the same, except the net gains are classified like business income and taxed accordingly rather than treated as taxable capital gains.

The above is my general understanding from my own experience. Best to talk to your accountant/tax advisor for detailed/formal advice.

Cheers,

Beej


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