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Capital Gains Tax

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Jay-684

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28 January 2005
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Just a quick question regarding CGT... the answer may seem obvious but I figured I'd ask someone more educated than myself!

I'm currently only 21 and in my last year of uni, after which I will obviously enter full time employment. My current income for this financial year will probably be less than $21,600, and thus will be taxed at only 15%.

My dilemma (if you can call it that) is that over the past 5 years I have managed (thanks largely to the bull market) to return a profit of over 150% (or approximately $60,000).

My thinking is that by selling my entire portfolio this financial year, my taxable income rate (15%) will be much lower than my prospective taxation rate in the future, and thus my total CGT payment will be lower - $4500 @ 7.5% compared to $9000 @ 15% or even $12,600 @ 21%

Is there anything I could be missing? It seems like a pretty dead easy question, but at my age there's alot I dont know!
 
The sensible answer here is to seek professional advice.

You're right, if you expect to earn more than you are currently in future financial years after graduating that the dollar value of the CGT you pay will be less ceteris paribus (ie. if in both circumstances they're eligible for the 50% CGT discount).

The dollar value of the tax bill shouldn't be your primary concern though. In many circumstances its best to defer as much tax as you can until later periods due to the time value of money. There are also other considerations, such as the wonders of compounding - keeping them in open trades may make you money on money already made through trading.

All in all, you're going to close out your trades sooner or later. If I were you, I'd let my trading plan dictate when I closed my trades - not tax. If you don't have a trading plan, you could start learning about them or see an account for tax advice and work from there.

Tax is (unneccesarily) complicated - you need to seek professional advice.
 
Hi Jay-684

I agree with doctorj's comments.

In addition, if I understand your original post correctly, if you sold your entire portfolio this year and booked a $60,000 profit then when you add that to your approx $21,000 income from other sources, your total taxable income for this year would be approx $81,000 (not including any other income or deductions you might have) and so your tax rate would be higher than just the 15% or whatever it is are now for income less than $21,000. (see the ATO web site for current tax rates). ie...I doubt very much your $60,000 capital gain would be taxed at 15% this year as your final tax rate is determined on your total taxable income for the year (salaries, wages, interest, dividends, cap gains etc etc)

But I am not a tax adviser or tax agent, so please take this as a guide only and speak to your own tax adviser or the ATO directly before acting.

Good luck

bullmarket
 
All of the above.

But seeing you dont do this for a living and you have no idea what your doing and you took a punt and just happened to "Win" 60K then perhaps it could be seen as a gamble that had a win/s.

Definately ask if this is a possiblilty.
 
Thanks for the advice!

Saying I have no idea what I'm doing may be a bit wrong though. I'll happily admit I would know 1% of the knowledge that many of you have in regards to share trading, however that is only 1%, and at my age, I have time on my side.
 
Jay-684 said:
however that is only 1%, and at my age, I have time on my side.
Click to expand...

Damn right, you're a long way ahead of most people on an age basis. Atleast you're not confusing bulls for brains.

Have you reviewed your trades (why you entered/exited, when you entered/exited, how much you entered/exited and what was really happenning when you entered/exited) to see if you might learn more from it?
 
doctorj said:
Damn right, you're a long way ahead of most people on an age basis.
Click to expand...
Jay-684 is not much further along than me in regards to financial situations, and I'm 3 years younger.

Anyway, I can't answer your question as I'm not licensed to give advice on tax. Give me another couple of months and I'll be able to give you advice on securities, derivatives, and managed investments though.

Off the topic. What industry are you planning to go into?
 
Jesse Livermore said:
Off the topic. What industry are you planning to go into?
Click to expand...

I'm currently in my third year of a Business(Property) degree at UWS Blacktown.

I'll be going into the property industry, however not entirely sure which sector, most probably Investment, Funds management or Development/Construction.
 
Hello Jay-684

Something else for you to think about is instead of selling all your positions and cashing out and paying tax is swap from trading to investing and put all the money into a product that returns a rate above bank interest charges on a personal loan. Then go to your bank and borrow against your investment portfolio. They will not give you 100% value of the shares but whatever they do give you is tax free and your only costs will be interest (and possibly principal depending on loan type) on the loan which hopefully will be less than the returns from your investment. This post is not a complete answer as there are other things to take into account like will repaymets be interest only or P and I. I only raised these points to try and think outside the box and give you some more ideas that you can raise when you visit your accountant. Bets of luck.

Scott

*This post is not a recomendation or financial advice*
 
If they are shares in the large cap stocks you might be able to roll the positions into installment warrants and realise some capital while defering tax liabilities.
Just another option

Again see a tax agent or someone qualified to provide such advice
 


God it was a nudge nudge wink wink serious consideration that may save you 100% tax.

You have never worked fulltime so there is a good chance that you could argue that your profits are no more than dumb luck!

If youve picked up $60K then your anything but dumb.
 
tech/a said:
You have never worked fulltime so there is a good chance that you could argue that your profits are no more than dumb luck!

If youve picked up $60K then your anything but dumb.
Click to expand...

I think a poster by the name of Rufus picked tried this already. Should be able to search through the threads - I recall him posting his story both here and Reefcap. It also featured a bit in the media.
 
Depending on your situation and how much you earn in the future, you could sell the shares over more than one financial year (which could be as simple as some on June 30th and the rest on July 1st) in order to avoid being pushed too high up the tax scales. Just a thought - I'm not a tax expert etc.

 
Jay-684 said:
Over the past 5 years I have managed to return a profit of over 150%.
Click to expand...
Jay-684,

What kind of analysis do you use to determine what companies are good? What where the companies in which which you profited the most over the past 5 years? How did you determine asset allocation etc.? Did you keep records of your transactions, and if so are you able to create a "Jay-684, How I made $60,000 in the Stockmarket" thread?

Excuse me for my nosiness, I'm curious.

Jesse Livermore
 

This is not finanical or taxation advice but please consider the following.

Assumptions:

60,000 is a gross CGT (i.e before losses and discounts have been applied), and you have owned the asset for more than 12 months (5 years it appears to be).

You have an accumulated HELP-HECS debt (formerly referred as HECS debt)
You do not have private health insurance (or covered by a parents)
You do not have a rental property
You do not have reportable fringe benefits

Your other income is $21,600.

What could happen if you sold:

The $60,00 will be declared at Item 17 Label H as $60,000 in the income tax return (itr). As you have owned the asset for more than 12 months,50% discount applies (i am assuming you are a natural person as defined in section 995-1 of the ITAA 1997) you will place $30,000 at Item 17, label A in the itr.

Your total taxable income would be $51,600 in 2006 income tax year.
The tax payable on $51,600 in 06 is $11,340
Medicare levy of $774.
Medicare levy surcharge: $516
HECS-HELP compulsory payment: $3096

So if you do sell, you need to keep in mind not only the tax, but compulsory HECS repayments that it may trigger, Medicare levy surcharge. and child support obligations you may have.

As you can see CGT is not actually a tax in itself like the UK, in OZ, CGT is to work out how much to be included as assessable income and tax at ordinary rates.

Shares will not fall under gambling nor a hobby pastime, as shares is defined as CGT assest under the Income Tax Assessment Act 1997 (section 100-25)
If you claim to be a business, the full $60,000 will be taxable and no 50% discount.

Call the ATO on 132 861 options 3 and 3.

Whatever ato person you speak to, make sure they know what they are doing, as there are some idiots that work there.

or see a registered tax agent or accountant but once again, there are some idiots that work at those organisations as well.

you can refer to ato website, type 4151 in search facility and the guide to cgt will come up.

Just a few things off the top of my head.
 
Thank you very much for the information below!

Luckily I have used my personal income to pre-pay my HECS debt so that is not a problem. The option of selling half this financial year and half next seems the best option, I will however seek advice from an accountant over the next month!

Thank you all for the wide range of information!

 
Jay 684,

Is there a reason for selling? For example, did you just happen to luck out and pick winners or did you apply some sort of Fundamental analysis and now the stocks in question are dogs?

Are you looking to use the money for something else?

The reason I ask is because you have a very nice portfolio for someone of your age that has the potential to really grow over your working life. The fact is you may never need to sell if you have stocks that pay dividends and these companies are likely to grow over time. Therefore you may never need to pay CGT on these stocks at all.

Imagine if the dividends keep increasing over the next 44 years (that is a bloody long time) as the companies grow. You are well on the way to a self funded retirement.

You may even choose to use you portfolio as security in aggressively pursuing your wealth creation strategy with the help of a little leverage in time (once you graduate and have a regular income).

Seriously, unless you need the money urgently you should give some consideration to holding this foundation for the long term. Sure it may drop somewhat over the next few years but what is 3,5, or even 10 years out of 44?

The capital markets work and over the long run they WILL go up. I would suggest that in the future you start looking at index funds that invest in hundreds and even thousands of stocks in one transaction as my only concern would be that you may well have 2 or 3 dogs in your portfolio that have the potential to do some damage. If that is not the case you have some serious thinking to do.

Just my two cents worth.

Adam
 
I forgot to add that once you get that full time job start a regular investment plan on a monthly basis. Put some away for a house deposit as buying should be good over the next few years and keep investing (but diversify into as much as possible).



(Wishing I was chasing returns instead of skirts at 21),
Adam.
 
Thanks for the advice grumpy boi (love the name!)

My aim from selling all my shares is purely to minimise my CGT from my still open trades over the last few years. My plan is not to sell my current stocks and then move on, but rather to sell them, then re-buy again almost straight away. That way I still own the stocks (and hopefully they will still keep rising in price) but I will have made a considerable saving on CGT as opposed to if I sold them in 3 years when I very well could be in the top tax bracket. I think I may have not explained myself enough in the earlier posts and thats whats caused the confusion. I dont need the money, and wont need the money any time in the next 24 months. All dividents are also in DRP's when available. Only when I purchase a property will I touch this money, and even then I'd still like to use only half of it for a deposit.

The idea of leverage right now doesnt really excite me. Although the thought of greater returns is enticing, I do not want to risk the advantage I have made by getting too greedy. I have had one or two dogs over the years (ION is one from memory). I have attempted to diversify to combat this through owning 23 stocks in various industries with bundles of between $1000 and $13,000, depending on their level of risk. I'm also making additions to my portfolio through currently attempting to save 50% of my income - ~$150/week.

Thanks again for the advice. All was very helpful!

Any more information would be muchly appreciated!
 
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