# Taxation



## Bin57again (20 July 2005)

Apologies. Boring as hell I know.
Simple question - what is the most tax effective way for an individual to trade? I'm not talking about super. Just disposable plain vanilla income. How can I keep minimise my tax liabilities?


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## kaveman (20 July 2005)

Talk to a good accountant specialising in taxation


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## RodC (20 July 2005)

I'm not accountant, so you probably should talk to one.

But it really depends on how much trading (and the type of trading) you are doing.

If it's just yourself then there probably isn't much point in complex structures, if you have dependents then (in some circumstances) a company or trust may be more appropriate. 

Find an accountant who understands what you want to do.

Rod.


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## money tree (20 July 2005)

1. only buy stocks paying fully franked dividends
2. end of year, take losses on losing trades (on paper) and ignore paper profits
3. try to keep stocks for 12 months (get 50% CGT discount)
4. instead of selling June 30, sell July 1. for the next few years tax brackets move outwards, deferring a sale will save hundreds of $$$ in tax
5. invest in tax effective vehicles such as instalment warrants
6. prepay interest on margin loans
7. update your computer every 3 years, sell the old one
8. claim phone, internet, electricity, books, magazines, courses, subscriptions....anything investment related
9. buy a stock that has an AGM in a location you would like to visit, then claim all related expenses
10. if you pay 48.5% tax, consider self funded instalment warrants
11. do some dividend stripping for franking credits
12. trade through a company
13. dont get paid CFD dividends
14. invest in NZ stocks, their tax rate is 33% and imputation credits are redeemable here (and 10% more potent)
15. buy high yield stocks in kids names and utilise $5000 franking credit limits and low tax rates
16. utilise cash extraction and cash injection strategies
17. hedge some holdings and if the hedge loses claim it
18. invest in good advice


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## kaveman (21 July 2005)

money tree, make certain your information is up to date for tax minimisation when it comes to investing/trading

As an example when investing you may not be able to claim computer or internet costs. These may not be deemed essential tools by the ATO


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## money tree (21 July 2005)

Bin57again asked in reference to trading, not investing

and since he is online here getting investment related info, he obviously has a computer and pays for internet access   , as such these will most likely be deductable.


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## Bin57again (21 July 2005)

Money tree
Thanks for your time on that - excellent response. I loved your point about the AGMs! I have some stock in JBM so will get myself over to Western Perth when I can! You mentioned deductions (point 8) and trading through a company (point 11) separately. Does this mean I can make deductions against my trading, even as an individual? 
Thanks.


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## kaveman (21 July 2005)

money tree said:
			
		

> Bin57again asked in reference to trading, not investing
> 
> and since he is online here getting investment related info, he obviously has a computer and pays for internet access   , as such these will most likely be deductable.




MT please check before posting
If you are claiming on incomme tax as a trader you cannot claim the 50% CGT event. As a trader your profit/losses in trading are classed as income not capital gains


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## Bin57again (21 July 2005)

Kaveman
How do you trade? As a company?


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## kaveman (21 July 2005)

I trade as a partnership, I have an ABN for this. Not exactly a company though. You do not really need this as you can trade as a sole trader (individual). I have partnership because there are 2 of us on the forms.

ps I happened to have spoken to my tax accountant yesterday, so am a little up to date on those areas of trading that affect me.


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## GreatPig (21 July 2005)

kaveman said:
			
		

> If you are claiming on incomme tax as a trader you cannot claim the 50% CGT event



And you don't get it if you invest using a company either.

GP


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## kaveman (21 July 2005)

thanks GP, haven't looked at company rules for trading/investing.

Just shows that you need to do your homework by searching the information from the source (ie ATO website), or from an accredited/licensed taxation specialist / accountant.


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## markrmau (22 July 2005)

kaveman said:
			
		

> If you are claiming on incomme tax as a trader you cannot claim the 50% CGT event. As a trader your profit/losses in trading are classed as income not capital gains




Dammit, I'm a bit confused here. I asked my accountant about 3months ago, and he said that it wouldn't really matter, I would get the 50% cgt either as trader or investor. Also said that I can claim part of my rent (based on rough floor area of room set aside for trading), and most of internet costs etc, but don't get greedy as you don't want to raise any red flags.

Admittedly I don't think trading is the accountant's area of expertise.


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## rozella (22 July 2005)

You may have read this before........

The difference between a "sharetrader" & a "shareholder" 

also look at the examples & the other fact sheets in the right hand column.

rozella


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## money tree (22 July 2005)

there is nothing there that says that a 'trader' cannot also have capital gains.

what happens when a trader sells an investment property?
what happens when a trader sells a share bought years ago before he was a trader?

can a trader become a 'holder' if he stops trading?
so a trader cannot claim interest? ouch!


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## GreatPig (22 July 2005)

markrmau said:
			
		

> I would get the 50% cgt either as trader or investor.



As that ATO article indicates, it depends on whether you're classed as an investor or trading business. As a trading business, there is no such thing as capital gain. All profits are normal income.

I've attached a couple of useful ATO legal documents on that issue. As far as I know they're still current. While they list some guidelines for determining business or investing operation, they're only guidelines and don't cover exact requirements (basically I think if your position was challenged, you'd just have to put up a good argument to support it).

Cheers,
GP


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## GreatPig (22 July 2005)

money tree said:
			
		

> there is nothing there that says that a 'trader' cannot also have capital gains



A trader cannot have capital gains on anything purchased as part of a business operation. Obviously if the business is share trading, then they could still get capital gains on an investment property, as that's not part of the business.

As for investment shares bought earlier, I'd guess that they'd still be able to get capital gain provided they kept them strictly separate from the business. If the line between business activities and investment activities became too blurred, then I think they might have difficulty separating them for tax purposes.

That's why I use separate entities for investing and trading.

As always, these are just comments based on my own understanding, not advice.

Cheers,
GP


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## rozella (22 July 2005)

I agree GreatPig,

You can be an investor & a trader at the same time, it is just easier to use separate entities.



> A share trader is a person who carries out business activities for the purpose of earning income from buying and selling shares. This person's position may be briefly summarised as:
> 
> receipts from the sale of shares constitute income
> *purchased shares would be regarded as trading stock*
> ...




So selling the shares is income & buying the shares is a deduction......no capital gains/losses have been created.

This is not advice just my own interpretation.  I use a company as an investor & personally I am a trader


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## emma (27 September 2006)

I'm unsure of changing from an investor to trader - my tax has this memo attached (by the tax agent).

"Mrs.....was an investor during the 2005 tax year.  She then decided to become a share trader.

All shares held on 30 June 2005 are her investment shares to be kept separate from share trading stock.  As she sells these stocks she pays capital gains.

All shares purchased after 1 July 2005 are trading stock".

Has anyone been though this process?  I'd like to verify that those stocks held at 30/6/2005 won't be included in trading stock.


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## Stinger (27 September 2006)

Emma,

It is possible to hold shares on both your capital account and a trading account. It has to do with your intention when ourchaseing the shares/ Therefore all shares held at 30 June 05 will be on capital account as you have  made this declaration. It is not possible to however transfer shares between these accounts without attracting CGT under the trading stock rules in the legislation.

You, or your accountant, should have two separate share schedules showing your buy/sells in your trading account and your buy/sell on your investment account. 

I hope this helps.


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## emma (27 September 2006)

Thanks Stinger for your reply.


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## rocket_science (11 October 2006)

emma,

I have a relative who works for the ATO.  My suggestion is to speak to an accountant who specialises in tax or to the ATO directly to confirm any advice you get.

At the end of the day it's the ATO that decides if a person is a trader or investor based on the information the person provides them.  Make sure any info you give the ATO is accurate 

good luck


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## maffu (26 October 2006)

money tree said:
			
		

> 17. hedge some holdings and if the hedge loses claim it



Lol that is awesome, i never knew that was possible.

Does it work like this?
So if i buy 1,000 shares at $50.00
Buy a put contract over the shares strike price at 50.00
If the share moves to $60.00 i can claim the hedge as an expense to lower my tax, making the premium paid essentially much cheaper.

If the share drops to $40.00 i can exercise the put, sell my shares at $50.00 and only lose the premium?


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## JAK (30 October 2006)

Hi all, apologies if its been covered elsewhere...... looked !

If I sold some shares today, which I held for less than 12 mths, and made say a $600 loss and have no gains to offset against, during this financial year, other than dividends, how would the ATO allow me to treat this loss come Jun07 ?

In other words, do I have a reasonable chance of claiming the entire amount ?  ( I want to get some idea of possibilities, before I call ATO)

Your comments would be most appreciated..........


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## Ferret (30 October 2006)

You can only use it to offset a capital gain.  If you dont have capital gains this year, you still report it and it carries through to next year or whenever you have a capital gain to offset against.

Ferret


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## Space Cadet (30 October 2006)

capital losses can only be offset against capital gains but capital losses can be carried forward indefinitely.

Also, if you have a capital gain from another asset classs - example property - then you can offset your capital losses from shares against capital gains from property.

As always, best to confirm with your own tax agent or ATO directlly for your particular circumstances.


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## GreatPig (30 October 2006)

Jak,

There are a couple of assumptions in those replies:

- that you're classified as an investor and not a trading business.

- that the loss is not in a family trust subject to the trust loss provisions.

GP


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## JAK (31 October 2006)

OK, I get the picture, thanks

IF I said my intention was to make some profit by trading a small volume of trades, using ETrade, my own computer, analysing the market etc....
but still had a day job that has nothing to do with share market, would that pass as a share trader ?

Thanks JAK


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## Duckman#72 (31 October 2006)

JAK said:
			
		

> OK, I get the picture, thanks
> 
> IF I said my intention was to make some profit by trading a small volume of trades, using ETrade, my own computer, analysing the market etc....
> but still had a day job that has nothing to do with share market, would that pass as a share trader ?
> ...




Hi Jak,

The ATO looks at a mumber of issues to determine whether you are in business as a trader or as an investor. There is not factor that classifies you as one or the other. Fair to say that the following factors are taken into account:

a) Amount of Capital involved
b) Your experience and expertise in the field
c) Amount of time spent on the activity
d) Likelihood and intent of making a profit
e) Repition and regularily of the transactions
f) Books and records kept in a business like manner.
g) Business plan kept and set methodology for trading.

The fact that you have another job doesn't mean that you are automatically classified as an investor and vice versa.

Duckman


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## JAK (1 November 2006)

Much wiser now,  thanks all for your advice

Much appreciated,  JAK


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## Fab (1 November 2006)

I am wondering in which account it is better to trade my share.
I have a company account, a family trust account and a commsec account.
Tax wise I understand it is better to do the trading under the lower income earner in that case my wife.
Company account are not good for shares trading in my understanding as they don't get the same benefit as personal share trading account.
What I am wondering is if I transfer my shares to the company trust would it be more tax effective as I potentially could re-distribute profit as dividend to the people associated to the family trust.

Can anyone advise on this  ?

Cheers


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## Stinger (1 November 2006)

I would trade through your family trust if you are making capital gains as these can be distributed to any beneficiaries in the most tax effective way. You dont actually distribute dividends from a trust, all income keeps its character when distributed to beneficiaries ie capital gains will be distributed as capital gains, dividends as dividends etc.

Just watch transferring your shares from the company or your own account to a trust though, as you will be hit by CGT as the legal owner has changed.


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## Fab (1 November 2006)

Thanks for your reply Stinger.
Do you happen to know if I can create a commsec account under my Family trust name ?


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## Stinger (1 November 2006)

I dont use commsec but i dont see why not. I am sure its a very common thing. Will probably need to fill out all the forms again etc


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## Sir Burr (1 November 2006)

Hi,

Interesting topic tax!

I'm wondering, I trade in the name of family members name where I pay a tax rate of 30%.

If I get to the stage where profits creep into the next tax brackets, is there another way?

Thx SB


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## Stinger (1 November 2006)

Trade within a company where the rate is fixed at 30%, however you have to pay top up tax when you distribute any income as dividends.


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## Fab (1 November 2006)

Stinger,

My understanding was that company where not treated the same way with regards to CGT .


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## Sir Burr (1 November 2006)

Stinger said:
			
		

> Trade within a company where the rate is fixed at 30%, however you have to pay top up tax when you distribute any income as dividends.




Thanks Stringer, what's "top up tax" ?

I'm guessing but does that mean if a family member earns money and the "company dividends" take them over the magic 30% bracket, then they pay the next tax bracket? Is this the "top up"?

If that is the case then a benefit in this might be to "distribute any income as dividends" between family members upto their max 30% and if possible hang onto to other profits until a later year?

SB


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## Sir Burr (3 November 2006)

One other question, do people record the date they buy the stock or T+3 in their taxation records?

SB


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## 123enen (3 November 2006)

You should record the day that you buy the stock. Contract date.
That is the day that the RISK and obligation is passed on to you. Does not matter that you pay 3 days later.(or receive money 3 days later)


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## Fab (3 November 2006)

As anyone got a Commsec account under a Family Trust name ? What are the benefit of it ?


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## carmo (3 November 2006)

rozella said:
			
		

> You may have read this before........
> 
> The difference between a "sharetrader" & a "shareholder"
> 
> ...




I have been just deducting my buying and selling costs from my profits, have I been doing the wrong thing? Should I have been claiming them as a allowable deduction instead?


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## Bin57again (12 November 2006)

Can anyone recommend a good value no nonsense tax advisor in Sydney? I just want good value straight advice without all the references to the tax legislation. Specifically (I suppose like many of us) I want to know the most appropriate vehicle for me to trade through. Can anyone recommend someone? What sort of hourly rate can I expect to pay? Would the cost of such advice be a deductible?
Thanks.


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## Bin57again (13 November 2006)

Can anyone suggest someone further to my post above. There are more than 100 certified financial planners in central Sydney alone. Can anyone provide a name of someone reliable and their hourly rate?
Thanks.


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## GreatPig (13 November 2006)

Fab said:
			
		

> As anyone got a Commsec account under a Family Trust name ? What are the benefit of it ?



Not Commsec, but I do have a broking account in a family trust.

The benefits are somewhat dependant on your personal situation, but in general, potential benefits are flexibility in distributing profits (assuming you make any) which can reduce tax, asset protection if the trust fully owns the funds (ie. they haven't just been lent to the trust), and if it's a hybrid trust (combination of discretionary and unit), the ability to negatively gear against a high income earners name while distributing capital gains to low income earners (part of the distribution flexibility).

The main disadvantages are the added cost and complexity.

You really need to discuss it with a knowledgeable accountant.

GP


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## GreatPig (13 November 2006)

By my understanding only...



			
				carmo said:
			
		

> I have been just deducting my buying and selling costs from my profits, have I been doing the wrong thing?



That is correct if you are classed as an investor (shareholder). The transaction costs form part of the cost base on sale.



> Should I have been claiming them as a allowable deduction instead?



Only if you are classed as a share trading business.

As I say though, my understanding only. Check with your accountant.

GP


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## GreatPig (13 November 2006)

Bin57again said:
			
		

> Can anyone recommend a good value no nonsense tax advisor in Sydney? ... Specifically (I suppose like many of us) I want to know the most appropriate vehicle for me to trade through.



You could try Nick Moustacas at Strategic Wealth Management. He's good, which for structuring is much more important than being cheap. I can't remember his hourly rate, but I don't recall it being extraordinary on either the cheap or expensive side.

And if you want, you can use him just for the structuring and then another accountant for the day to day stuff and tax returns. If you end up with a trust though, particularly a hybrid trust, you want an accountant that actually knows something worthwhile about them. Many don't.



> Would the cost of such advice be a deductible?



I believe so, but am not sure of the exact details. They'd be able to tell you that though if you ring them or send them an email.

Cheers,
GP


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## Bin57again (14 November 2006)

Thanks GP. I'll look into it. Thanks for taking the time to respond. All the best.


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## two40 (16 November 2006)

Good thread, very informative. I have something to add/ask.

If the ATO considers you to be carrying on a business isn't it just wiser to apply for an ABN (Sole Trader) and claim all possible expenses? What are the benifits of getting an ABN over simply trading without one? If the ATO considers you to be carrying on a business you might as well act like it and claim GST credits.    

eg.

I earn $60k per year from a full time position unrelated to trading.

I earn $25k NET in FY 2007 trading with an ABN as a Sole Trader.

The tax rate had I not traded would have been $2,850 + 30c per $1 over $25k = $13,350

With trading profits the income would see me into the next tax bracket being: $17,850 + 40c per $1 over $75k = $21,850


So in the above scenario the CGT is treated as a component of my income tax and I get taxed at the higher rate. Had I made a loss of $15k I would be taxed at the lower rate ($60k income only) and the loss would be carried over to the next year to offset any profits. So in the next year if I made $25k I could use the $15k loss from the previous year giving me a total income of $60k + $10k = $70k to be taxed at the lower rate being $2,850 + 30c per $1 over $25k.


When carrying on a business of share trading your share purchases become your trading stock ie COGS. Your sales become your Income and Gross Profit is detirmened by Income less COGS. Net profit is the result of deducting all expenses (computer exp, books & mags, part of your rent, electricity etc etc) from your Gross Profit. It is this Net Profit that you treat as your Capital Gain to add to your other income to calculate your tax payable.

Now if you have an ABN and are carrying on a business you will be paying a fair amount of GST for all the expenses incurred and there is no GST collected on income so the tax man will give you a refund when you lodge your BAS.

A benifit of creating a company to trade through is the tax rate of 30% vs the tax rates for personal income which can be as high as ~45%. The more you make the more enticing creating a company is. However, pulling money out of them is    Companies have their own pro's and con's which we won't get into here. Trusts are another matter which I cannot comment on.

References:

ATO Tax Brackets

CGT

CGT Essentials

If I've made any errors please correct me.


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## GreatPig (16 November 2006)

two40 said:
			
		

> If the ATO considers you to be carrying on a business you might as well act like it and claim GST credits.



You need to register for GST as well as have an ABN.



> Now if you have an ABN and are carrying on a business you will be paying a fair amount of GST for all the expenses incurred



For share trading, you mainly have GST on brokerage, which is not a lot unless you trade a lot. You then have to trade off the amount you can claim back against the hassle of submitting periodic GST statements (BAS forms).



> A benifit of creating a company to trade through is the tax rate of 30% vs the tax rates for personal income which can be as high as ~45%. The more you make the more enticing creating a company is. However, pulling money out of them is



Yes, you have to always remember that company funds are not _your_ funds, and that they can only be utilised for the benefit of the company. Any transaction that is not arms-length (ie. one you would equally do with someone unrelated) may result in those funds being deemed a dividend, with loss of associated franking credits.

So the 30% tax rate is good if you would otherwise be on a higher rate, but only as long as the profits stay in the company. When it comes time to take them out, the only real means is through dividends, which makes who the shareholders are important. The shareholder could be a family trust, but then the company becomes subject to the trust loss provisions which may prevent losses being carried forward (this is the setup I have).

Another potential problem is if you build up a lot of profits with associated franking credits and then the government goes and lowers the company tax rate. That's good for future earnings, but locks some of your existing franking credits in the company, since I don't think you can issue a dividend at a higher franking rate than the prevailing company tax rate. So if you're hoping to just retain earnings until you retire and then start taking dividends, you're risking effectively losing some of the franking credits if the company tax rate is lowered in the interim.

As they say, every silver lining has its cloud...

GP


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## Duckman#72 (16 November 2006)

two40 said:
			
		

> Good thread, very informative. I have something to add/ask.
> 
> If the ATO considers you to be carrying on a business isn't it just wiser to apply for an ABN (Sole Trader) and claim all possible expenses? What are the benifits of getting an ABN over simply trading without one? If the ATO considers you to be carrying on a business you might as well act like it and claim GST credits.
> 
> ...




Hi two40

You do not have a choice to have an ABN. You are either in business - in which case you must have an ABN or you are an investor.

As for trading through a company structure - just be very careful. They are not for everyone. They can be expensive to setup, complicated and can incur the wrath of the ATO far quicker than trading as a sole trader/partnership. 

A couple which invested in joint names would have to make a combined profit of more than $200,000 before it becomes cheaper for them to use a company structure (admittedly they could assess super rules). But the point is a lot of people think to make "big money" they need to set up complicated tax structures which is just not the case.

Duckman


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## two40 (17 November 2006)

GreatPig said:
			
		

> For share trading, you mainly have GST on brokerage, which is not a lot unless you trade a lot. You then have to trade off the amount you can claim back against the hassle of submitting periodic GST statements (BAS forms).




What about all the expenses? They also have GST which you may claim. With no GST collected it soon becomes a nice little refund and the trouble of filling out BAS forms is nothing really. A Trader would not have an array of transactions to complicate BAS's and many beginners will fall under the $50k voluntary GST registration thus only having to complete one BAS form.




			
				Duckman#72 said:
			
		

> Hi two40
> 
> You do not have a choice to have an ABN. You are either in business - in which case you must have an ABN or you are an investor.




So the ATO will actually force you to take up an ABN?   


Say, I do have a question for personal tax and the way deductions offset it.

I made $50k in the year. I spent $11k in the year in deductable expenses with  a component of $1k in GST. Now, does the whole $11k come off my income making it a taxable total of $39 or is it the net deductable amount of $10k making it $40k. If it's the net amount what happens to the GST portion? Does it offset the tax payable at 100% thus basically having the same effect as it would under a business setup? If the GST does not offset your final income tax payable at 100% then there is no doubt that having an ABN and claiming GST credits is the only way to go for traders.


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## two40 (19 November 2006)

two40 said:
			
		

> I made $50k in the year. I spent $11k in the year in deductable expenses with  a component of $1k in GST. Now, does the whole $11k come off my income making it a taxable total of $39 or is it the net deductable amount of $10k making it $40k. If it's the net amount what happens to the GST portion? Does it offset the tax payable at 100% thus basically having the same effect as it would under a business setup? If the GST does not offset your final income tax payable at 100% then there is no doubt that having an ABN and claiming GST credits is the only way to go for traders.




Finally found it. In a nutshell you are better off registering for GST even if you don't have to. Here's why:



			
				ATO said:
			
		

> GST credits and income tax deductions
> 
> Where you can claim an income tax deduction for a business purchase, you claim the amount of the purchase less any GST credit you are entitled to claim. If you are not entitled to claim a GST credit for the purchase, you can claim the full cost of the purchase, including GST, as a deduction.
> 
> ...




So without being registered for GST you can still claim the GST portion of your expense which sounds good right? Yes but there's a catch. Say your tax rate is the maximum at 45c. When you claim expenses to the value of $11k with $1k of GST included you are reducing your income by that amount. If you look at the GST portion only you have reduced your income by $1k so you have saved yourself paying *$450* tax. Now this is the maximum rate. Most people would fall in the lower tax rates only receiving $300 or $400.

If you were registered for GST you would be able to claim that $1k completely and the lovely ATO department would send you a nice cheque as proof.

Reference:

GST for Small Businesses


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## GreatPig (19 November 2006)

two40 said:
			
		

> What about all the expenses?



My trading company doesn't have many other expenses. Accounting fees for doing the tax return might be the main other one, and the annual ASIC fee which I don't think has any GST on it.

I'll have to check with my accountant if he's claiming an input credit for the GST component of his own invoices.

GP


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## Fab (21 November 2006)

GreatPig said:
			
		

> Not Commsec, but I do have a broking account in a family trust.
> 
> The benefits are somewhat dependant on your personal situation, but in general, potential benefits are flexibility in distributing profits (assuming you make any) which can reduce tax, asset protection if the trust fully owns the funds (ie. they haven't just been lent to the trust), and if it's a hybrid trust (combination of discretionary and unit), the ability to negatively gear against a high income earners name while distributing capital gains to low income earners (part of the distribution flexibility).
> 
> ...




How do you trade . Do you have a bank account under your family trust name ?
How can the money be own by the trust without you earning it first and transfering it to the family trust account ?


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## GreatPig (21 November 2006)

Fab said:
			
		

> Do you have a bank account under your family trust name ?



I hold shares in two different entities: a trust for investment and a company for trading. Each entity has its own bank account.



> How can the money be own by the trust without you earning it first and transfering it to the family trust account ?



It can't. Even profits earned within the trust itself have to be distributed.

If this question relates to my comment about asset protection if the trust fully owns the funds, then that can be achieved through gifting (rather than lending or buying units).

However, gifting is less flexible for you, in that you can't just take the money back if you suddenly need it for something personal, so you might want to weigh that against the real risk of your being sued.

GP


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## Duckman#72 (21 November 2006)

two40 said:
			
		

> So the ATO will actually force you to take up an ABN?




Hi Two40

You seem to be confusing an application for an ABN with voluntary registration for GST.

If you "a trader" in the eyes of the ATO then you are in business. As you are in business you therefore require an Australain Business Number. There are no choices. What you need to do is feel comfortable that you would pass the criteria put forward by the ATO to be connsidered in business.

Whether of not you register for GST is entirely up to you. Yes you are correct in that from a cash flow view point you are getting more back by being in the GST system. 

Regards

Duckman


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