Capital Gains Tax

Below is something I wasn't aware of : Question and answer in Noel Whittaker's column in today's Sunday Mail, Qld.

Question:
We have a share trading portfolio in which we held shares for more than 12 months and sold them after a recent price spike. Because they were in our trading account - and not our investment portfolio - we have been told we cannot get the 50 percent capital gains tax discount. Is this correct?

Answer:
A trader does not get the 50 percent discount for the CGT if the asset is held for a year, but they can offset losses against income from sources such as rents and salary.
An investor cannot do this.

Just wondering how - for tax purposes - the ATO distinguishes a trader from an investor? If, e.g. I started trading some of my thus far long term investments on a frequent basis, would the above rule apply to me?

Julia

http://www.ato.gov.au/businesses/content.asp?doc=/content/21749.htm

Carrying on a business of share trading - Fact Sheet
Printable version
What is ‘carrying on a business’ of share trading?
A ‘business’ for tax purposes includes ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. This definition would include a business of share trading.

The question of whether a person is a share trader or a share holder is determined in each individual case. This is done by considering the following factors that have been used in court cases:

*the nature of the activities, particularly whether they have the purpose of profit making(err??? i invest in shares to lose shat loads guess i must be an investor then.. wtf lol)
*the repetition and regularity of the activities
organisation in a business-like manner,
*the keeping of books or records and the use of a system
*the volume of the operations, and
*the amount of capital employed.

Click to expand...

each ot those has a sub heading .. still a hazy area.. and since it is a hazy area i think the 50 percent rule should be across the board... I doubt you would find many short term traders who don't also invest (unless thier undercapitalised - and then would they be classified as a share trader by the above defintion) why should they be penalised? the example in the sunday mail really highlights that.. imo anyway i guess they have some reasoning for it..

Julia,

As Tarnor says, I think it can be a grey area with a number of factors considered. The extremes would be obvious, but in the middle it could be difficult to say one way or the other.

Ultimately I think it is the intention that is important: whether your intention is to invest for dividend income and longer-term capital gains, or to carry on a business to make profits by buying and selling shares. However, to substantiate your intention, you may need to show some of the things mentioned in that ATO article. A business-like approach is probably important if you intend to be a share trading business, meaning having things like a business and trading plan, profit forecasts, doing market analysis and research, keeping business records, etc.

See also the attachments in my message near the start of this thread.

If, e.g. I started trading some of my thus far long term investments on a frequent basis, would the above rule apply to me?

Click to expand...

A potentially risky thing to do, for that reason. If you got classed as a share trader, I think all shares in that same entity would then be classed as business trading stock and lose their 50% CGT discount. I think you'd have to be trading quite a lot though for that to happen.

That's one of the reasons why I have a trust for investment and a separate company for trading.

Cheers,
GP

My question is are you allowed 50% discount first before offsetting losses?

Eg i bought 100 MBL shares at $35 and sold at $70 after 12 months

however i also have $1750 losses carried forward

So my Capital Gain is 100*35 = $3500 so do i

1) Offset with losses then 50% discount: (3500-1750)/2 = $875 to be taxed?
2) 50% discount then offset losses: 3500/2-1750 = $0 to be taxed?

Any links?

Thanks

have to apply your losses first then your discount

if you had traded some shares say made 2k on a short term trade you could offset last years losses on that parcel first then teh remainder of the losses onto your 50percent discount profit... then you could apply the discount .. thats how i've always done it ..will try to find you the relevant info so i dont lead you astray tho...

here EXAMPLE 5 - Mei Ling is identical to your question

http://www.ato.gov.au/content/downloads/NAT4152-05.pdf

do not forget that as a trader you can offset a lot of your costs against your income from share trading, that you cannot do against investment capital returns (eg computer, software, data ). A trader may not get the 50% but all losses are written off in the same year against your income so you get immediate benefit. An investor has to wait to write the capital losses only against capital gains, not income.

kaveman said:

as a trader you can offset a lot of your costs against your income from share trading, that you cannot do against investment capital returns (eg computer, software, data )

Click to expand...

By my understanding, computers and software are capital costs, not expenses, and thus need to be depreciated.

Don't know about data.

Cheers,
GP

Depreciation used to be on $300 or more capital costs.
Below that was expenses.
Not sure if the limit is the same now.

I think data is an expense as it's ongoing daily, just as say petrol for a work vehicle is ongoing, don't depreciate say $5k a year, when do $100/wk fills.

Check with an accountant (disclaimer)

Thanks to all for replies.

With apologies for hijacking my own thread, all the discussion about offsetting costs against tax reminds me of some years ago in NZ when I was working for a multinational pharmaceutical company and sometimes carried samples of drugs in my car, as well as storing them at home. When doing my tax return I claimed the purchase price of my dog (German Shepherd), all veterinary expenses, food and sundry expenses, on the basis that I was carrying dangerous drugs (Schedule 3 at the time) and needed the protection both in the car and in my home. Thought it was worth a try. The Tax Office passed it (to my surprise) and I benefited to the tune of a few thousand $. Sadly, it didn't work the following year.

Julia

tarnor said:

have to apply your losses first then your discount

if you had traded some shares say made 2k on a short term trade you could offset last years losses on that parcel first then teh remainder of the losses onto your 50percent discount profit... then you could apply the discount .. thats how i've always done it ..will try to find you the relevant info so i dont lead you astray tho...

here EXAMPLE 5 - Mei Ling is identical to your question

http://www.ato.gov.au/content/downloads/NAT4152-05.pdf

Click to expand...

Hi tarnor,

I've always totalled capital gains across the portfolio (after applying 50% rule to individual stocks) then offset with capital losses, either in the same year or carried forward from previous years. Is that what you mean?

Julia

As far as i know this is how it works and the way i've always done it. please correct me if i'm wrong someone and of course see a tax professional for the real shiz

Lets say last year was the year that you cleared out all the old doggies you fell in love with when you first started as a newb..

Scenario 1
Capital Losses from last year 5000$

This year all up you made 7000$ in short term trades and 1000$ in losses

You also sold off one you'd been holding for a few years getting the 50% discount on say an 8000$ profit

[Losses must be applied to profits before the discount ruled is applied to the profit... you can apply losses in the order that benefits you the most]

the best way would be to deduct the losses from previous years away from your short term trading profit of 6000..

so basically
gains = 7000 + 8000 = 14000


losses = 5000 + 1000 = 6000

we want to take the losses away from the short term parcel

cg = 7000 (-6000) + 8000
= 1000 + 8000
= 9000 (8000 + 1000)

now we apply 50% discount
= (8000*.5) + 1000
= 4000 + 1000
= 5000

had you applied the losses to your 50 percent discount profit you would have to pay tax on 8000 instead of only 5000

______________________________
Example 2
Lets now go with a bigger capital losses from previous years say 10000,
This years short term profits 7000
This years short term losses 1000
One 50% discouted of 8000

Losses = 10000 + 1000 = 11000
Gains = 8000 + 7000 = 15000

CG = (8000 + 7000) - (10000 + 1000)
CG = 15000 - 11000

once again we want to take the losses away from our short term trades first before eating into our 50 percent discount.. we only have some of our 50 D left now

CG = 4000
CG = 4000*.5 applying discount to scraps
CG = 2000

_____________________

Julia
you should defiantely apply losses before applying the discount even though it might not have made a difference for you in the past.. If thier wasn't enough normal profits to soak up your losses by applying the 50 discount before deducting losses you will have the wrong capital gain.

hope that helps probably a bit hard to follow :/

Tarnor:

Thank you for that. It's some years since I've actually done a tax return - moved all my shares into the SMSF where the accountant handles the tax return. However, I should have the understanding right, and it looks as though I didn't.

So you can choose to apply your capital loss, whether from this year or carried forward, to whichever capital gain you like?eg

Company A has gain of $4000. Have held it over a year.

Company B has gain of $6000. Have held it less than a year.

Company C has loss of $5000.

So I can deduct the $5000 from Company B's $6000, leaving profit of $1000/
Then deduct the 50% from Company A's $4000 gain, leaving total taxable of $3000. Is this correct?

Thanks for putting me right on this.

Julia

yes to my understanding that is correct and said a lot more simply then my lengthy post lol

if company C had 8000 loss that would eat into your 50percent discount before you could apply the discount


disclaimer: Not a tax professional so seek pro advice

Hi everyone

If you know your way around an Excel spreadsheet, I think you can simplify things even further as far as keeping the records you need for tax purposes.

As a suggestion, maybe try setting up a spreadsheet with something like the following headings.

Stock Date Time Purch Sale Capital Taxable
Sold Held Cost Proceeds Gain/Loss Cap Gain
(days)

Capital gain/loss is sale proceeds minus purchase cost. If the trade resulted in a capital loss then the Taxable capital gain will be a negative number equal to the whole capital loss. If you had a capital gain and held the shares for less than 365 days then the taxable cap gain will be the entire capital gain. If you had a capital gain and the shares were held for more than 365 days then the Taxable capital gain will be 50% of the total capital gain.

Youll have to create your own excel formulae to check for how long shares were held and do the subsequent number crunching. But if you can use the IF function and the basic arithmetic functions in excel then you will be ok.

Then at tax time, simply add up all the +ve gains in the Taxable cap gain column (profits) and all the -ve gains in the same column (losses). You'll have to use a conditional IF statement which can be a bit messy, but the excel online help gives good guidance on how to setup the conditional IF. Hopefully the gains will be greater than the losses and the difference between the two is your nett cap gain for the year. If you have losses carried forward from previous years then you can reduce your nett cap gain for this year by the amount of losses carried forward from previous years.

If the losses for this year is greater than the gains then you have no nett capital gain and you can carry this loss plus also any losses from previous years forward to next year to hopefully reduce any nett cap gains next year.

But bear in mind, I am not a tax agent or adviser and the above is just my understanding of how things work for an individual. For SMSF's or other structures the tax rules and procedures could be very different, so pelase take the above as a guide only and not necessarily 100% correct and get your own tax advice if unsure of your situation.

Hope this helps someone and good luck

bullmarket

The best format i have seen regarding to work out your net capital gain is actually in the legislation itself.

Section 100-50 of the Income Tax Assessment Act 1997 (ITAA 1997) states:

SECTION 100-50 How to work out your net capital gain or loss

1. Reduce your capital gains for the income year, in the order you choose, by your capital losses for the income year. (If the capital losses for the income year exceed the capital gains, the difference is your net capital loss. You cannot deduct a net capital loss from your assessable income.)

2. Reduce any remaining capital gains, in the order you choose, by any unapplied net capital losses for previous income years.

3. Reduce any remaining discount capital gains by the discount percentage.

To find out what is a discount capital gain and the discount percentage: see Division 115.

4. If you carry on a small business, apply the small business concessions in further reduction of your capital gains (whether or not the gains are discount capital gains).

For the small business concessions: see Division 152.

5. Add up:

(a) any remaining capital gains that are not discount capital gains; and
(b) any remaining discount capital gains.
The total is your net capital gain.

In relation to the Superannuation fund. If it is a complying superannuation fund, it is entitled to a CGT discount as well (section 115-10 of the ITAA 1997). However, it is not 50% discount, it is a 33 1/3% discount.

Generally speaking, CGT is calculated the same way for individuals and superannuation funds.

Once again, this is not financial advice, nor taxation advice, please contact appropriatly qualified people.

PS the 50% discount etc only applies to transactions after September 1999. Before hand, indexation calculation would be required.

I am surprised that nobody has considered "bracket creep" despite the fact that I posted on it a while back:

https://www.aussiestockforums.com/forums/showthread.php?t=1760

secondly, WHY SELL ?! you have added $60k equity. Why throw away $20k in tax?