# Capital gains tax question



## steven1234 (6 March 2007)

Hi all

I have a capital gains tax question.  I thought i'll post here before I researched and spoke to my accountant.  I only recently started trading so have not had to pay any tax yet.  I understand there is a 50% CGT discount if you hold the shares for more than a year.  Now the question- 

Say I bought 10,000 shares of X on 1 July 2007 at 10c.  During the year I accumulated and traded more of X but never let my holdings drop below 10,000 shares.  When i finally sell all my holding of X on 1 August 2008 at a value of $1.50 will I get the 50% CGT discount on the $1.40 profit made on the original purchase back on 1 July 2007?  During the year I would have accumulated and sold at prices between 10c and $1.50.  

The question I'm getting at is when you have holdings you purchased at various prices, how do you determine which holding you have sold.  Is the first purchased the first sold?  

Thanks


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## legs (6 March 2007)

you can only sell the shares after 12mths and get the discount ... so say you sell the original package after 12 mths, you get it....It is impossible to name the individual shares as to when you got them. So.... you can the sell the original amount you bought after 12 mths and say if you bought an additional 3000 3 mths after the original package was bought ....you can sell them after you have owned them 12mths....but if you only sold 7000 of the original ones, you can sell the other 3000 any time after the original package was held 12mths.


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## steven1234 (6 March 2007)

The strategy i am considering is this:

Buy say 10,000 to 20,000 shares in recently listed or other "cheap" companies and keep an eye on them.  Trade the rises and falls over the next few months but never let your holding drop below your original 10,000 to 20,000 in the year.  This way you can sell that portion and get the capital gains discount after a year.   

If played right you can create a paper loss in relevant periods if you sell shares which have dropped since your last accumlataion (although the reality is you are selling the batch you originally purchased at a fat profit and holing the most recently purchased waiting for a rise).   

Does this make sense?  

Eg 

Buy 100 CQT March 06 at 10c = $10.00 (total holding is 100 CQT)
Buy 80 CQT Jan 07 at 93c = $93.00 (total holding is 180 CQT)
Sell 80 CQT Feb 07 at 80c = $64.00 (total holding is 100 CQT)

On paper this will yield a $29 loss, where the reality is a gain of $56 (70c x 80)

Then in March 07 you can sell your remining 100 CQT and get the CGT discount.


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## Duckman#72 (6 March 2007)

steven1234 said:
			
		

> The strategy i am considering is this:
> 
> Buy say 10,000 to 20,000 shares in recently listed or other "cheap" companies and keep an eye on them.  Trade the rises and falls over the next few months but never let your holding drop below your original 10,000 to 20,000 in the year.  This way you can sell that portion and get the capital gains discount after a year.
> 
> ...




Hi Steve

I don't really understand what the benefit of your strategy is.  

You get to elect which parcel of shares you are selling. So in your example you would elect for the sale of the 80 CQT shares to be the ones purchased for 93c. On paper AND in reality this is a $29 loss.

Lets say that in March 2007 you sell CQT for 80c. You will then make a capital gain of 70c of which 35c is taxable. 

Don't be sidetracked by the fact that you are always keeping "10000" shares rolling during the year. That is beside the point. Each share has a "cost base". In your example you would have been much better just keeping the original parcel of shares and then selling after 12 months. The buying and selling of shares in your example has not helped your tax situation in anyway - except assist in creating a capital loss!!!

Duckman


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## GreatPig (6 March 2007)

Basic answer is that you can choose which shares you are selling at any time, whatever most benefits you. One strategy is to always sell the ones with the highest purchase price, that way you'll minimise gains or maximise losses. However, that may need to be traded off against the CGT discount for holding more than 12 months.

One thing to consider though is that if you trade shares too often, you might get classed as a trading business, in which case you won't get either CG or the CGT discount.

GP


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## steven1234 (7 March 2007)

thanks for the input


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## Captain G (7 March 2007)

Hi Greatpig, How do you get to choose which shares you want to sell with an online broker ??  Eg.  Say you bought 100 XYZ shares in Jan, then bought another 80 in Feb, then sold 60 in March. I always thought these 60 sold would come from the Jan 100 initial purchase ?? So does this mean, in order to choose, would you need to do a phone order with your broker?? 
Cheers, Capt.


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## YELNATS (7 March 2007)

steven1234 said:
			
		

> Eg
> 
> Buy 100 CQT March 06 at 10c = $10.00 (total holding is 100 CQT)
> Buy 80 CQT Jan 07 at 93c = $93.00 (total holding is 180 CQT)
> ...




Steven, I was a little confused by the example, in particular, 
" Buy 80 CQT Jan 07 at 93c = $93.00 (total holding is 180 CQT) ".
For a purchase value of $93.00, wouldn't the unit price be $1.1625?

However, I support the views of your other respondents. regards YN.


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## YELNATS (7 March 2007)

Captain G said:
			
		

> Hi Greatpig, How do you get to choose which shares you want to sell with an online broker ??  Eg.  Say you bought 100 XYZ shares in Jan, then bought another 80 in Feb, then sold 60 in March. I always thought these 60 sold would come from the Jan 100 initial purchase ?? So does this mean, in order to choose, would you need to do a phone order with your broker??
> Cheers, Capt.




'Evening Captain, no I don't think you need to do this with your broker. 

All shares under the one share code are considered homogeneous by the broker. It's just that when you come to do your tax return at the end of the year you have the flexibility to nominate from which batch of shares you are selling - ie from the Jan batch and/or from the Feb batch in your example - so as to minimize your CGT liability in the current year or defer it to a future year.

regards YN.


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## GreatPig (8 March 2007)

Captain G said:
			
		

> How do you get to choose which shares you want to sell with an online broker ??



What Yelnats said.

See the ATO Guide to Capital Gains Tax, page 37.

Cheers,
GP


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## hitmanlam (8 March 2007)

I get what steve's trying to say.  His just asking what method to use when  your purchasing/selling stock. 

ie. First in, First Out (FIFO) or Last in, First Out (LIFO) method.

There will be more chance of accessing the 50% discount on capital gains using the LIFO method as the shares you first purchased will be held for longer.


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## Kimosabi (8 March 2007)

Does anyone Buy/Sell Shares etc using a company?

Are there any advantages/disadvantages of buying/selling within a company structure.


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## bhiggins (8 March 2007)

My understanding is FIFO - First in First out method.

If you buy 10,000 @ $1.50 - 1 July 2007
Buy another 5000 @ $1.60 - 1 October 2007

Then sell 5000 @ $2.00 - 1 July 2008

You are required to add $1250 in your assessabke income and taxed at marginal tax rates in financial year of sale (after 30/06/2008).

$1250 = (2.00-1.50) X 5000 X 50%


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## Prospector (8 March 2007)

Kimosabi said:
			
		

> Does anyone Buy/Sell Shares etc using a company?
> 
> Are there any advantages/disadvantages of buying/selling within a company structure.




I do.  First, if you are classed as a trader, then you can deduct GST from the brokers fees.  You do not get any benefit from the 12 months rule; any profit goes into the company calculations and is always taxed at 30%. Shares are considered as 'stock'.
Benefits?  not sure really, it is just a different way of trading.

And you do get to choose which package of shares you sell first.  My software asks this very question when I am doing my share paperwork - ie it asks whether I want to minimise, or maximise CGT (or Loss)  - portfolio planner from solosw.com (with whom I have no alliance by the way!)  And the accountant has confirmed this!


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## wintermute (8 March 2007)

As long as you keep detailed records, which allow you to show which parcel of shares has been sold then you can arbitrarily sell which ever parcel gives you the best tax advantage... There is a detailed document on this on the ATO's website. 

One of the things you need is a unique identifier per trade, you can use your contract note number for this. I just purchased topshare which is another software package that allows you to keep track of your trades (and produces reports to help at tax time  I'm also not affiliated in any way with topshare  

Tony.


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## GreatPig (8 March 2007)

The benefits of trading (not investing) in a company are the 30% tax rate, if your personal rate is higher, the ability to retain profits at that tax rate (compared to a trust which must distribute all profits), and possibly the limited liability should you happen to make a major loss somehow, perhaps with derivates during a major crash (the chances of getting sued I think are very low though).

Just my understanding of course, not advice.

GP


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## Kimosabi (8 March 2007)

My gut feeling tells me I'm better off trading shares in a company, mainly because of the 30% Tax limit and the ability to claims GST credits.  I also like the limited liability aspect as well, even though I never plan to make a loss.

The accountants I have talked to always say you should have shares personally, but I personally don't agree with them.

My objective is to never pay more than 30c in the dollar tax.


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## Julia (8 March 2007)

If you have the shares in a Super Fund you only pay 15% tax

Julia


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## GreatPig (8 March 2007)

Kimosabi said:
			
		

> My objective is to never pay more than 30c in the dollar tax.



It's not as simple as that, and there are other disadvantages.

If you trade in your own name and do make a loss, it can usually be offset against your other income (the ATO might be keen to establish that you really are running a trading business though). Losses in a company are trapped there.

If you do make a profit, then sure, it's only taxed at 30% and the remainder can be retained and used without further tax. However, one day you'll want to get your profits out, and that normally has to be via dividends, which will be franked at 30%. If the shareholder is still on a higher marginal rate, then there will be more tax to pay. However, you do get the flexibility of deciding when to pay those dividends, and can effectively delay that extra tax by not distributing. Waiting for the shareholder to retire or be on a lower marginal rate is also a possibility.

One risk with that though is if the government ever lowers the company tax rate. My understanding is that dividends can only be franked at the prevailing tax rate, even if the franking credits were accrued at a higher rate. That could lead to not being able to distribute all your franking credits, and the shareholder paying even more tax on dividends.

Finally, the rules regarding the use of company funds by directors are somewhat strict, and if you try and use them for any private purpose, the ATO may deem them to be dividends - which you then have to take without any franking credits! You'd want to be at least basically familiar with Division 7a (governing directors' use of company funds). You can create shares of different classes and distribute dividends unequally on those classes, but there's also a Part IVa provision (anti-avoidance) about dividend streaming which limits that.

So there's more to it than just a 30% tax rate. Also remember that a company has a 30% flat tax rate, whereas individuals have a sliding scale. I can't remember the exact figure now, but an individual needs to be on something like $100K a year to paying more than a 30% average tax rate.

GP


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## nioka (8 March 2007)

Trying to reduce tax using a Company structure cost me more than it would have done without one over the years. Just allow it as a "cost of production" and take any advantage to minimise it where you can. You only pay it when you make a profit, the more the tax the bigger the profit.


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## theasxgorilla (8 March 2007)

nioka said:
			
		

> Trying to reduce tax using a Company structure cost me more than it would have done without one over the years. Just allow it as a "cost of production" and take any advantage to minimise it where you can. You only pay it when you make a profit, the more the tax the bigger the profit.




With tax brackets where they are the breakeven point, particularly for a couple, is very high these days.


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## Kimosabi (8 March 2007)

Well, I've got two companies, one is a holding company for the other, from what I can gather you can offset tax credit/losses from one company to another.

The idea is for the holding company to retain most of the assets while the trading company is effectively sacrificial in the event of some unforeseen malady to afflict it, thus to a degree protecting the assets of the business.

Now the holding company can wind up holding substantial amounts of cash and I want to make this cash work for the company.  Currently the cash is in ING earning 6% but I'd prefer it if I could get some of the cash earning a better return, ie shares/property.

My highest priorities are:

1.  Protect personal/business asset's
2.  Make as much money from those asset's as possible
3.  Tax

I really don't mind paying tax, because as far as I'm concerned, if I'm paying tax I'm making money.  (But the less tax I have to pay the better)


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## Duckman#72 (8 March 2007)

nioka said:
			
		

> Trying to reduce tax using a Company structure cost me more than it would have done without one over the years. Just allow it as a "cost of production" and take any advantage to minimise it where you can. You only pay it when you make a profit, the more the tax the bigger the profit.




It is good to hear some honesty Nioka. I agree. Heaps of people believe they need complicated trust and company tax structures to minimise tax. Listen to Great Pig - the 30% tax rate is not the be all and end all. In many cases company tax structures can cost you tax (in that they are much more inflexible than investing in a partnership or as a sole trader).

Cheers

Duckman


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## Prospector (8 March 2007)

Just to clarify, our company structure existed well before I traded shares - we just had some leftover capital we could 'play with' and rather than leave it in the bank, I used it on the share market.  Trading shares isnt our principal reason  for existence, although the profits have been rather nice!  Setting up a company just to trade shares doesnt really seem like a good idea to me!


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## hitmanlam (9 March 2007)

Just remember guys that if your holding assets long-term e.g. property or holding a long term share, you will not get the 50% discount on capital gains in a company.

In a trust structure or as an individual, you will get that CG discount.

Essentially, companies are only for ppl on higher tax brackets. e.g greater than 40% marginal rate = $75,000 income in 2006/7.  If you're not, then you just wasting time & money setting up a company.


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## Prospector (9 March 2007)

hitmanlam said:
			
		

> Just remember guys that if your holding assets long-term e.g. property or holding a long term share, you will not get the 50% discount on capital gains in a company.
> 
> In a trust structure or as an individual, you will get that CG discount.




Yep, I said that in the first post!


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## nevieboy (9 March 2007)

Hi guys.
What are the chances of being caught out 
by the A.T.O. if you don't declare profits you 
have made by the sale of shares during the year.
Has anyone experienced this?


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## theasxgorilla (9 March 2007)

nevieboy said:
			
		

> Hi guys.
> What are the chances of being caught out
> by the A.T.O. if you don't declare profits you
> have made by the sale of shares during the year.
> Has anyone experienced this?




A superior question to ask would be, what is the penalty?


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## nioka (9 March 2007)

theasxgorilla said:
			
		

> A superior question to ask would be, what is the penalty?



99% chance of being caught and Double tax if caught. My advice...don't even think about it.


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## nevieboy (9 March 2007)

theasxgorilla said:
			
		

> A superior question to ask would be, what is the penalty?



The reason i asked is that i truly forgot to declare a dividend cheque that i received (it was under $60.00) last financial year, from one of the shares i hold.


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## nioka (9 March 2007)

nevieboy said:
			
		

> The reason i asked is that i truly forgot to declare a dividend cheque that i received (it was under $60.00) last financial year, from one of the shares i hold.



Doubt if that is a hanging offence. If it was franked you are probably behind.


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## theasxgorilla (9 March 2007)

nevieboy said:
			
		

> The reason i asked is that i truly forgot to declare a dividend cheque that i received (it was under $60.00) last financial year, from one of the shares i hold.




Ring the ATO and ask...you can be anonymous, but to be sure do it from a pay phone...in another suburb


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## barnz2k (9 March 2007)

I was bout to ask question in similar area..

How do all the short term traders deal with tax? Seems as there are quite a few members here who frequently sell and buy. If you are commonly selling for a small profit, how does this work with the tax and broker fees all the time?


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## nevieboy (9 March 2007)

nioka said:
			
		

> Doubt if that is a hanging offence. If it was franked you are probably behind.



The $60.00 cheque is not the point. It could have been a $600.00 or $6000.00 cheque. The point is firstly i forgot and secondly it was not questioned. Was i one of the 1% that slipped through?
P.S. No it wasn't franked.


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## GreatPig (9 March 2007)

If you honestly forgot, I believe you can make an adjustment to your return. Not sure how you go about it though, as I always use an accountant.

GP


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## YELNATS (9 March 2007)

GreatPig said:
			
		

> If you honestly forgot, I believe you can make an adjustment to your return. Not sure how you go about it though, as I always use an accountant.
> 
> GP



For tax reasons, I had to vary the wage content of my income package one year. My accountant asked me to write a letter to the ATO - ie. I went to them cap in hand, laid all the cards on the table, and there was no problems. regards YN.


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## Duckman#72 (9 March 2007)

nevieboy said:
			
		

> The $60.00 cheque is not the point. It could have been a $600.00 or $6000.00 cheque. The point is firstly i forgot and secondly it was not questioned. Was i one of the 1% that slipped through?
> P.S. No it wasn't franked.




Noika has a valid point - materiality does come into it.

For the past several years the ATO has access to taxpayers bank interest amounts. The ATO just uses the database to compare the bank interest lodged in the tax return compared to the the interest paid according to the financial institutions. Now before I get a heap of replies saying..."I never show interest in my return", let me say.......the ATO has always used a materiality principle. You would have been unlikely to get a letter from the ATO if the discrepancy was in total less than $100.

The same system is now set for trial for dividends. The ATO will have access to your dividend details as received from company records. Any discrepancies will be easily identified from the switch of a button - but again a materiality prinanciple will apply.

As for penalties - yes Great Pig is correct. If you volunteer the error then the minimum penalty rate will apply (20% of the tax error). The ATO break the penalties up into classifications - the most serious being intention disregard and recklessness (75% of the tax error). You will be hit a penalty as well as interest on the unpaid tax portion.

I aslo believe the ATO are also moving to come on line with audits of property sales. With the huge number of rental property purchase/sales over the past decade the ATO want to make sure they are getting their correct amount of revenue.

Duckman


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## Prospector (10 March 2007)

The ATO cannot check everyone's returns every year, it only checks a random sample, or those occupational groups they have targetted for that year.  So most years, very few people get 'caught out'.  But one day you might get audited and if they find an error in the current audit, then they will go back through previous years for errors too.

My thoughts are that there are so many 'cash sales' businesses they should be checking on (ie add an extra couple of 000's to your $60), that that is where their energies should be going.

If you notify the ATO that you made a genuine mistake, before they find it, then I think you would be fine.  I have found them to be very reasonable people when you take the initiative for contact, rather than the reverse.


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## vida (10 March 2007)

I met a guy who told me he never declared his share sales,  never paid CGT on his profits.  His reasoning was that the tax department are after the big money profiteers and not people like him, so he was convinced he was never going to be audited on it. He had been doing it for a very long time he told me and was very confident it was ok.  At the time I was speaking to him he declared to me that he had made a profit of $45,000 on a recent share sale. So maybe he is right and the tax department just try to scare people into full disclosures and its really all bluff. I only met him once or twice, this was quite a few years ago so I don't know if he has since then been audited and penalised.  He said the tax department are after bigger evasions and not interested in wasting time searching for people with his modest gains. 



			
				nevieboy said:
			
		

> Hi guys.
> What are the chances of being caught out
> by the A.T.O. if you don't declare profits you
> have made by the sale of shares during the year.
> Has anyone experienced this?


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## vida (10 March 2007)

"If you trade in your own name and do make a loss, it can usually be offset against your other income (the ATO might be keen to establish that you really are running a trading business though). Losses in a company are trapped there."

Is that true? I have found you cannot offset any share losses against other income, only against share profits.  If one hasn't made a profit on a share sale in any year, there is nothing to offset them against. However, the losses can be carried over to the following year/s when there are share profits from which to deduct the share losses. 

I personally am still carrying a loss from several years ago, which I have partly deducted each year since from any profits.  The loss was relatively big for me and the profits I make each year are really small so its taking a long time to set it all off. I generally do not sell any shares and the year I made the big loss was the time of the last significant crash. I should not have sold but panicked and made a significant loss on just about everything. Since then I've virtually had to start again, a big learning curve I have to say.

So there is one good thing about that big loss, its made me more cautious and taught me not to sell good shares in a panic.  I try not to panic no matter what now, but I did recently and fear made me sell one holding which was falling on the day the media broadcast the china meltdown but it was still in profit, and later that day it went up again and its still rising. damn!!!

Anyway, a loss can be carried over to future years to offset capital gains until its totally used up, so its never a total loss - i have saved myself having to pay capital gains on some profitable sales over past few years.








			
				GreatPig said:
			
		

> It's not as simple as that, and there are other disadvantages.
> 
> If you trade in your own name and do make a loss, it can usually be offset against your other income (the ATO might be keen to establish that you really are running a trading business though). Losses in a company are trapped there.
> 
> ...


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## barnz2k (10 March 2007)

> For the past several years the ATO has access to taxpayers bank interest amounts. The ATO just uses the database to compare the bank interest lodged in the tax return compared to the the interest paid according to the financial institutions. Now before I get a heap of replies saying..."I never show interest in my return", let me say.......the ATO has always used a materiality principle. You would have been unlikely to get a letter from the ATO if the discrepancy was in total less than $100.




Do you know if they do this with money earnt under an ABN? if an overseas company pays directly into your account but they have your abn - can it actually be tracked in Aus?


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## Duckman#72 (11 March 2007)

barnz2k said:
			
		

> Do you know if they do this with money earnt under an ABN? if an overseas company pays directly into your account but they have your abn - can it actually be tracked in Aus?




This should probably be best served by a banker, but if the bank account was one held with an Australian based bank then it is possible that it could be tracked. As I understand it the banks report transactions over a certain amount.

Cheers
Duckman


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## GreatPig (11 March 2007)

vida said:
			
		

> I have found you cannot offset any share losses against other income, only against share profits.



When you're investing and make capital losses, they cannot be offset against other income.

However, if you're trading as a business, I think you can - although I could be mistaken.

Cheers,
GP


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## Duckman#72 (14 March 2007)

GreatPig said:
			
		

> When you're investing and make capital losses, they cannot be offset against other income.
> 
> However, if you're trading as a business, I think you can - although I could be mistaken.
> 
> ...




If you pass the non-commercial loss rules you can.


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## Sir Burr (27 April 2007)

Just wondering if this is the way you calculate your capital gains or even knew about it?
This is a reply I received:-



*You cannot offset a discounted capital gain with a full loss, this would be great if you could. For example, if you have a loss on one trade of $5000 and a capital gain of $10000 which is eligible for discounting, you cannot offset the discounted capital gain (10000 * 50%) $5000 with the $5000 loss to equal zero.

The tax office expect you to offset the total gain (10,000) against the $5000 loss and then to apply discounting to the remainder ($5,000 * 50%) = $2500.*



Cheers SB


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