Capital gains tax question

[theasxgorilla]

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.

 

[Kimosabi]

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)

 

[Duckman#72]

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

 

[Prospector]

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!

 

[hitmanlam]

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.

 

[Prospector]

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!

 

[nevieboy]

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?

 

[theasxgorilla]

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?

 

[nioka]

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.

 

[nevieboy]

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.

 

[nioka]

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.

 

[theasxgorilla]

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

 

[barnz2k]

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?

 

[nevieboy]

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.

 

[GreatPig]

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

 

[YELNATS]

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.

 

[Duckman#72]

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

 

[Prospector]

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.

 

[vida]

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.

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?

 

[vida]

"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.

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