A Taxing question

[ALFguy]

I've looked through threads on here, sought advice from friends/family and even spoken to a financial consultant friend, but still not clear about my tax position.

Trading is my only form of income, I do this in a sole trader/business like manner for tax purposes, so my understanding is that I simply pay income tax on any profits I make, right?

What's confusing me is stock I held at the beginning of the financial year and stock I hold at the end. Am I liable for tax on the value difference? And if so, where does my opening stock come into the equation? I mean, that's startup stock (capital) right?

Trying to compare myself to a retailer selling goods but not sure if that is the correct approach.

This is my first year of profitable trading, hence the query.

 

[UPKA]

u will only be taxed after u sold off ur investment, so the difference in value is not considered in ur tax return unless its been sold off.

 

[Mousie]

Which is also why, if you're keen to sell off your profitable investments, wait till July to do it so that you'll only pay tax 1 year later.

 

[GreatPig]

If you are considered (or considering yourself) a trading business, then yes, your portfolio at the end of the fin year is considered trading stock and you have to pay tax on any increase in value from the start of the fin year.

I'm not real clear on how it works, but my understanding is that you take the difference in open profit you had at the start and end of the year and treat that as taxable profit. Note that this is profit (ie. gain), not total capital value.

Try searching the ATO website for the section on trading stock, or much easier, ask your accountant.

Cheers,
GP

 

[ALFguy]

I don't have investments, I either day trade or hold usually a maximum of 10 days.

Maybe I'm not asking the question correctly, but I'd like to know how my holding stock at the end of any financial year is viewed. Surely it's an asset, potential capital or similar that would attract tax?

How about this for example:-

Beginning of year, I hold stock 5,000 XXX valued at $10,000

I then...

Sell 5,000 XXX at $15,000 ($5k profit?)

I also...

Buy 2,000 AAA for $3,000
Sell 2,000 AAA for $5,000 ($2k profit?)

And finally...

Buy ZZZ for $8,000

End of financial year, ZZZ is worth $10,000 but I don't sell.

Since my starting stock was $10,000 value, I make $5k profit selling, then trading AAA, I make $2k profit so in my eyes I owe tax on $7k.
But what about ZZZ, it's value has increased even though I haven't sold and it'll be my opening balance for the next financial year?

This is where I'm unclear.

 

[ALFguy]

If you are considered (or considering yourself) a trading business, then yes, your portfolio at the end of the fin year is considered trading stock and you have to pay tax on any increase in value from the start of the fin year.

I'm not real clear on how it works, but my understanding is that you take the difference in open profit you had at the start and end of the year and treat that as taxable profit. Note that this is profit (ie. gain), not total capital value.

Try searching the ATO website for the section on trading stock, or much easier, ask your accountant.

Cheers,
GP

Thanks GP, that kind of makes sense, though I can't find anything on the ATO site other than information relating to retail stock. I'm assuming it's the same thing though, ie shares bought are treated as 'stock' just like a retailer holding stock of an item (beans, nails etc) and this 'stock' has value or future potential value.

So, difference between opening and closing stock hey? I'll do some more research.

 

[clowboy]

ZZZ will incur a tax liabilty on the unrealised profits, unless you value closing stock at cost.

Setting up a spreadsheet or the likes will make it alot easier and cheaper come tax time.

According to my accountant you can take closing inventory at either purchase price or at market value. I have not looked into this further as in my eyes it is easier to just value it at closing price.

You would have to value all stock at either PP or market value.

Generally speaking most of my profits have come from closed posisitons so valueing the closing stock at PP has little real effect in my tax position.

 

[Mousie]

If you are considered (or considering yourself) a trading business, then yes, your portfolio at the end of the fin year is considered trading stock and you have to pay tax on any increase in value from the start of the fin year.

I'm not real clear on how it works, but my understanding is that you take the difference in open profit you had at the start and end of the year and treat that as taxable profit. Note that this is profit (ie. gain), not total capital value.

Try searching the ATO website for the section on trading stock, or much easier, ask your accountant.

Cheers,
GP

I'd have to disagree GreatPig.

If you own a business, you don't consider an increase in inventory/retail stock a profit. A profit is what's left after you sell something, not when your asset value increases (unless you live in countries that tax you on your net worth ).

I treat it thus: Any positions that I closed by June 30 I take the difference to determine the gain (or the loss); any positions left open by then I don't bother with tax implications. I hope this is clear as regards a trading business' tax.

 

[ALFguy]

I treat it thus: Any positions that I closed by June 30 I take the difference to determine the gain (or the loss); any positions left open by then I don't bother with tax implications. I hope this is clear as regards a trading business' tax.

How can you not take into account your open position as at June 30?

Does this mean that post June 30, if you close this position, you then realise the gain/loss as being from the original purchase price?

 

[clowboy]

The value of closing stock in a BUSINESS's P+L influences there tax liability.

If a business buys $1000 worth of stock at the begining of the year and at the end of the year it is Valued at $1100 then they have a $100 profit on which tax is liable.

There are different ways to value the stock though, ie cost , MV etc.

There is also STS to take into account, for startup, small bussinesses.

An ATO link which might be helpful.

http://www.ato.gov.au/businesses/content.asp?doc=/content/14160.htm&page=3&H3

 

[ALFguy]

The value of closing stock in a BUSINESS's P+L influences there tax liability.

If a business buys $1000 worth of stock at the begining of the year and at the end of the year it is Valued at $1100 then they have a $100 profit on which tax is liable.

There are different ways to value the stock though, ie cost , MV etc.

There is also STS to take into account, for startup, small bussinesses.

An ATO link which might be helpful.

http://www.ato.gov.au/businesses/content.asp?doc=/content/14160.htm&page=3&H3

Thanks clowboy, no idea how you found that info on ATO, the search function is rubbish.

This now makes more sense as I simply deduct all sales from purchases for the year and then take into account any startup and current holding stock. Seems too simple though.

 

[GreatPig]

If you own a business, you don't consider an increase in inventory/retail stock a profit.

You do, although I'd imagine in most cases that the stock would have depreciated so there'd actually be a loss.

Your treatment is correct for an investor, but not for a business.

GP

 

[robots]

hello,

as a trader, you have collected profits and losses, this is what the ato is concerned with as a "trader"

the profit or loss on that particular trade will get carried over to next financial year

just a quick one, have friend who works at ato, if your share dealings are irregular, opportunistic, hobby like then you have case for it to be treated as a hobby and as such no tax payable

now if things are strategic, planned, regimented then you may be treated as trader etc

thankyou

robots

 

[clowboy]

Thanks clowboy, no idea how you found that info on ATO, the search function is rubbish.

This now makes more sense as I simply deduct all sales from purchases for the year and then take into account any startup and current holding stock. Seems too simple though.

Yep, that simple,

OPEN + purchases - Sales - Closing = profit.

Deductions then come out of that

And yes I find the ATO website horendous for finding what you want

 

[ALFguy]

Yep, that simple,

OPEN + purchases - Sales - Closing = profit.

Deductions then come out of that

And yes I find the ATO website horendous for finding what you want

They note that you only have to declare this if there's a difference of more than $5k in your opening and closing stock value. That's pretty interesting when deciding if to take profits pre year end.

http://www.ato.gov.au/businesses/co...htm&pc=001/003/028/001/011&mnu=&mfp=&st=&cy=1

Thanks again clowboy, nice and simple is what I was after.

 

[yonnie]

well guys, I got the defenite answer here from a book from Renton "Income tax and Investment"

I actually said it before on a tax thread about a week ago:

as a share trader you can choose how to value each position:
at cost - how much you paid for them
at market value - how much they are worth at year end

so some shares you can value at purchase cost and others at market value - however you have to take the total value of your shares you decided on to the new tax year.

to minimise tax, your valuation at years end should be:

all losing positions at 30 June market value: you take the losses in this tax year
all profitable positions at cost: you take the profits in the coming year(s)

every business owner can value their end of year stock how they want and a share trader is no different.

so ALFguy you can value your ZZZ stock at $ 8,000 at year end and pay no tax on your unrealised profit.

 

[clowboy]

well guys, I got the defenite answer here from a book from Renton "Income tax and Investment"

I actually said it before on a tax thread about a week ago:

as a share trader you can choose how to value each position:
at cost - how much you paid for them
at market value - how much they are worth at year end

so some shares you can value at purchase cost and others at market value - however you have to take the total value of your shares you decided on to the new tax year.

to minimise tax, your valuation at years end should be:

all losing positions at 30 June market value: you take the losses in this tax year
all profitable positions at cost: you take the profits in the coming year(s)

every business owner can value their end of year stock how they want and a share trader is no different.

so ALFguy you can value your ZZZ stock at $ 8,000 at year end and pay no tax on your unrealised profit.

Yea that is pretty much what the ato website says, but wouldnt you only want to do this if your tax bracket is going to be the same or lower next year?

Myself for example, if I have the same returns this coming year as I have had the last 11 months I will pop up a bracket and have to pay an extra 12% tax.

I'd rather pay a higher liabilty this year than have to fork out an extra 12% next year, Although, I guess it depends how much I can make on the money I dont pay in tax this year.

Tax, why can't they simplify it?????

 

[Mousie]

Yea that is pretty much what the ato website says, but wouldnt you only want to do this if your tax bracket is going to be the same or lower next year?

Myself for example, if I have the same returns this coming year as I have had the last 11 months I will pop up a bracket and have to pay an extra 12% tax.

I'd rather pay a higher liabilty this year than have to fork out an extra 12% next year, Although, I guess it depends how much I can make on the money I dont pay in tax this year.

Tax, why can't they simplify it?????

Well this is a case of "to each their own" I guess; I usually wouldn't wanna pay tax one year early if I can defer it to the following year and see what deductibles pop up along the way to minimise my tax then.

IMO you gotta be pretty confident of how much income you're gonna get from your trading business for you to pay tax early. Not to mention if your original plan was to trade a particular stock but for some reason you suddenly decide you wanna hold it for more than 12 months. That's wasted tax money LOL!

Also applies if your shares go down in the new financial year - you just paid tax on lessened profits