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Capital gains tax question

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steven1234

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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
 
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.
 
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.
 
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.

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.
Click to expand...

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
 
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
 
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.
 
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)
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.
Click to expand...

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.
 
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.
Click to expand...

'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.
 
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.
 
Does anyone Buy/Sell Shares etc using a company?

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

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

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

Julia
 
Kimosabi said:
My objective is to never pay more than 30c in the dollar tax.
Click to expand...
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
 
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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